How to transfer a capital loss to your spouse

Accountant Mark Goodfield, aka The Blunt Bean Counter,

Transfer capital loss to your spouse

No one does a ‘high five’ over a capital loss, especially if you can’t use it as an offset. But maybe your spouse can.

Many couples trade independently and even if they trade together, one spouse may have realized capital gains while the other spouse has unrealized capital losses.

Because the Income Tax Act does not permit transferring losses directly to a spouse, the typical strategy of selling stocks with unrealized losses to net against realized capital gains is not applicable. However, you are not out of luck.

The Income Tax Act prevents taxpayers from triggering a loss by selling a property to an affiliated person such as a spouse through the superficial loss rules.

However, using proper tax planning, spouses can use the superficial loss rules of the Income Tax Act to allow one spouse to offset their gains against the losses of the other spouse.

How to transfer the loss

Say June bought Glowing Gold Mines for $20,000 and the shares are now worth only $5,000, while her husband Ward is a sharp trader and has numerous gains. In order to transfer June’s capital loss to Ward, she sells her stock on the open market.

Ward then immediately buys Glowing Gold Mines on the open market for $5,000. June’s losses are denied under the superficial loss rules because Ward, an affiliated person, has purchased the same security within 30 days of June’s selling.

But in an ironic twist of income tax fate, June’s loss of $15,000 is denied, but it is added to the cost base of Ward’s shares. His Glowing Gold Mine shares now have a cost base of $20,000 and if he sells them for $5,000 at least 31 days after purchasing them, Ward will have a $15,000 loss to claim against his capital gains even though he only purchased the shares for $5,000.

This article provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisor.

This is an edited version of an article that was originally published for subscribers in the January 2019, issue of The Taxletter. You can profit from the award-winning advice subscribers receive regularly in The Taxletter.

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