Thursday 13 September 2007

Capital Losses and Superficial Loss Rule Using an RRSP

Investoid posted a comment that is worthy of a new separate post. In it he says he was not aware of the tactic to sell a holding in an open taxable investment account to lock in a capital loss then to immediately re-acquire the same holding inside an RRSP.

Oops, should have noticed that in the document before posting. There's a rule of investing - if it looks too good to be true, it probably isn't. It applies here. Or does it? Let us say we have conflicting opinions, including from the CRA itself!

This extract from Chapter 5 of the CRA's T-4037 Capital Gains Guide seems to say no, you cannot do that, the superficial loss rule applies. It states:
''you, or a person affiliated with you, buys, or has a right to buy, the same or identical property (called "substituted property") during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale ....
Some examples of affiliated persons are:
  • you and your spouse or common-law partner;
  • you and a corporation that is controlled by you or your spouse or common-law partner;
  • a partnership and a majority-interest partner of the partnership; and
  • after March 22, 2004, a trust and its majority interest beneficiary (generally, a beneficiary who enjoys a majority of the trust income or capital) or one who is affiliated with such a beneficiary.''
In other words, the RRSP is a trust and you are the beneficiary so the CRA says no it isn't allowed. Probably, people started taking advantage too much and the CRA changed the rules in 2004 to stop it.

That's not the end of the CRA story, however. It doesn't actually say trust = RRSP and you = beneficiary. In my zeal to get a definitive confirmation I called the CRA helpline. After a good long wait to get to a rep and then again while he went off to consult with someone, the answer was, the CRA says yes it is allowed, and quoted me from an internal document #2001-008077, written in 2001. When I expressed my doubts and asked him to re-confirm, since I was about to post this on the Internet and I am not out to embarrass the CRA (really!), he said he would get back to me by next Tuesday at the latest. (For those who think badly of the CRA for this, ask yourself whether a service rep at a typical corporate helpline, say Bell Canada's, would even consider looking further into such a matter.) Wouldn't it be nice if the CRA added a specific mention of RRSPs (and RRIFs since they would presumably be similarly affected) to their Capital Gains guide regarding this matter?

Web sources don't seem to agree either, perhaps no surprise. Here's a brief sample of results from a bit of Googling:

No, It is Not
AIM Trimark's Capital Loss Planning
Posting in Canadian Business forum in April 2006
Another posting in Canadian Business from Jan. 2006 that mentions an Altimira Funds publication saying No as well.
CIBC Wood Gundy article on Tax Loss Selling with no date and the added footnote, hilarious in light of the absent date, ''The information contained herein is considered accurate at the time of posting.''

Yes, It is OK
Milestone per the previous post (April 2002) And it's one of my favorites! column by Jamie Golombek (a VP at AIM at the time of writing in Nov. 2002)
Canadian Shareowner article from NovDec 2000
Bylo posting of Jonathan Chevreau article in the National Post from Nov.21, 2000
Sterling Mutuals article Avoid Superficial Losses in Nov.2001
Institute of Chartered Accountants of BC Tax Traps and Tips article Nov. 2003

My bet is on the ''not allowed'' side. Any opinions? I suspect all this is to re-discover the sad truth of stale content on the web and the fact that one cannot necessarily believe everything that is written, even from reputable organizations.

Thanks, Investoid for the topic!

Update Oct.10 - Finally got a call back from Revenue Canada and the answer is now NO, you are not allowed to do it, or more precisely, your capital loss will be declared superficial and denied on your tax return. The relevant subsection is 251.1 (g) of the Income Tax as modified in 2005.


Anonymous said...

It's not allowed per the 2004 legislation - definition of affiliated...end of story.


CanadianInvestor said...

Thanks JG.... I'm curious what answer I will get from the CRA rep when he calls back!

Anonymous said...

I found this link with a formula w.r.t tax loss on partial sales:

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