Quasi-identical RSUs

Today the CRA has publicly released their reply to my Technical Interpretation request on subsection 7(1.31) and superficial loss. You can cite it as “CRA Document 2023-0972451E5”. You can also read the original request, which I wrote and submitted three years ago.

The CRA issues these interpretations to clarify their views on potentially ambiguous areas of Canadian tax law.^[1]For an overview of Technical Interpretations and the process for requesting them, see IC70-6R12, “Advance Income Tax Rulings and Technical Interpretations”. The ambiguity in this case concerned the interaction of superficial loss^[2]A superficial loss is a loss, sustained on the sale of stock or other property, that is disallowed for tax purposes by s. 40(2)(g)(i) of the Income Tax Act (ITA), because you acquired an identical property around the same time. The term “superficial loss” is defined in s. 54. and Restricted Stock Units (RSUs).^[3]For background on RSUs, see Aaron Fennell (RBC), Employee compensation — restricted and performance share units. All employees with stock awards may need to be aware of this, particularly if their grants vest on a monthly cycle.

To wrap our heads around this, we need to stack three rules together, each modifying the last:

1. Multiple lots of the same stock may be acquired at different times, such as on a regular vesting schedule. The “adjusted cost base” (ACB) of such shares must generally be computed by taking a weighted average of all acquisition events.^[4]ITA s. 47(1). The ACB is the reference point for determining gain or loss.^[5]ITA s. 40(1).
2. Shares acquired under an employee share agreement (such as RSUs or employee stock options) are electively exempt from rule #1’s averaging if sold within 30 days.^[6]ITA s. 7(1.31). I have slightly simplified the conditions for the sake of exposition; the text of the provision should be read carefully in its entirety for a full understanding. This is achieved by means of a provision that deems them not to be “identical” to other shares for cost-averaging purposes.^[7]ITA s. 47(3).
3. If employee shares described by rule #2 are sold at a loss, but replaced by new shares acquired within the 61-day period centered around the sale, then the loss is disallowed as superficial.^[8]ITA s. 40(2)(g)(i), s. 54 “superficial loss”. This replacement might arise as the next month’s vest of the same grant, for example.

The somewhat counterintuitive result of the interplay of these provisions is that “identical” has different meanings depending on the context:

• In the context of cost averaging, s. 7(1.31) in conjunction with s. 47(3) causes shares to be deemed non-identical.
• In the context of superficial loss, those same shares may be factually identical, with no deeming provision overriding the facts.

The CRA reached the right answer in regard to the scope of s. 47(3), and I commend them for a well-reasoned response. If you read my request you may see that I played a bit of “devil’s advocate” by sketching out an alternative theory urging harmony between provisions. But in my heart I must admit there is no ambiguity in the text of s. 47(3) or the limiting effect of its opening words “For the purpose of subsection (1)”. And where the words of the Act are clear we should not resort to more abstract considerations of context and purpose.^[9]See Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, paras. 21-23, and Pooja Mihailovich, “Words Matter: The Limits of Purposive Interpretation”, in Tax Disputes in Canada: The Path Forward (CTF, 2022), pp. 1:8-9.

However, I do find the CRA’s approach to variable B of their Superficial Loss Formula^[10]The CRA has stated this algebraic formula in several interpretations. See e.g. CRA Documents 2002-0176785, 2004-0073011, and 2005-0150811E5. This formula is an administrative invention which does not appear in the ITA. The Superficial Loss Formula usually produces a better outcome than applying the ITA literally, but in the example I give here, it is worse. to be problematic. Let’s take a dead-simple case:

• you bought a share 10 years ago (old-share),
• two factually identical shares (new-shares) vest today under an RSU agreement, and
• you sell both new-shares tomorrow at a loss, and designate them under 7(1.31).

There are no other shares in the picture. You never sell old-share. Maybe you forgot old-share even exists. No one can deny that the shares you sold are the new-shares.^[11]ITA s. 7(1.31) imposes an ordering rule: the particular security to which it applies “is deemed to be the security that is so disposed of” in the disposition described by the provision.

Taking the ITA literally, there is no superficial loss here, because the only acquisition during the 61-day period around the sale of new-shares is the acquisition of new-shares themselves, and you didn’t own them by the end of the period.^[12]See clause (b) of ITA s. 54 “superficial loss”, requiring ownership or right to acquire the substituted property at the end of the period. The old-share cannot be a substituted property, because it was acquired before the 61-day period began.

Unfortunately the CRA’s Superficial Loss Formula says that this loss is 50% superficial due to the retention of old-share:

• S = number of items disposed of = 2
• P = number of items acquired in the 61-day period = 2
• B = number of items left at the end of the period = 1
• L = loss on the disposition as otherwise determined
• SL = (Least of S, P and B) ∕ S × L = (1 ∕ 2) × L

In this new interpretation, the CRA confirms: “With reference to Variable B of the Superficial Loss Formula, it is the CRA’s view that the number of securities left at the end of the Relevant Period means all securities that are identical, including securities acquired before that period.”^[13]CRA Document 2023-0972451E5 (emphasis added).

This definition of variable B makes sense in the absence of s. 7(1.31) because it treats sales as occurring in first-in, first-out (FIFO) order as required by s. 7(1.3).^[14]In a surprising example of “action at a distance”, s. 7(1.3) imposes an ordering rule for all of Subdivision C (Taxable Capital Gains and Allowable Capital Losses), not just for employee shares which are within the purview of section 7. Without s. 7(1.31) it would be impossible to sell new-shares without first selling old-share.

But I think the CRA should have modified their formula to take s. 7(1.31) ordering into account for shares subject to that provision. I described a good way of doing this in section B.3 of my request, where I wrote: “Amount B should consider only those items left at the end of the period which were acquired during the period.”

It was fun to obtain a Technical Interpretation, but it is not for the impatient. I wrote to the CRA on May 1, 2023. For two years very little visible progress occurred; my inquiries for status updates were met with perfunctory comments to the effect that the matter was awaiting internal reviews or approvals by one group or another. The final interpretation was sent to me privately on Oct 20, 2025 after I submitted a service complaint about the delay, and another five months passed before the CRA released it to third-party publishers like Tax Interpretations.

In their response to my service complaint, the CRA said, “Your request involved a novel issue that has not been previously considered and that required the input of two Divisions within the Directorate.”

If you are the CRA reading this, rest assured that I have more novel issues coming down the pipe for you.