How to skirt the 'superficial loss' rule

How to skirt the ‘superficial loss’ rule

It’s perfectly legal

(PhotoAlto/Frederic Cirou)

(PhotoAlto/Frederic Cirou)

Here’s an easy—and perfectly legal—way to get around Canada Revenue Agency’s dreaded “superficial loss” rule. This rule was created to prevent you from selling a stock or other asset that’s temporarily doing poorly so you can realize a capital loss, then buy the investment right back. For instance, say you had stock in Royal Bank that you intended to keep for years, but it happened to be having a bad quarter. You might be tempted to sell it off, use the capital loss to pay less tax on capital gains elsewhere, then buy your Royal Bank stock right back. The CRA won’t allow you to do that (so don’t even try), but there’s nothing preventing you from repurchasing a similar­—but not identical—property that would allow you to realize a capital loss. For example, you could sell a Canadian equity ETF when it’s showing a loss and then buy another Canadian equity ETF that tracks a similar but not identical index. Got you, tax man!

» What you need to know about tax loss selling

Tax savings: Can be large, but make sure you play by the rules.