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Canadian tax question


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What happens when you cross into a new year with a short stock position in your portfolio for the CRA? Do you book a gain on the full sale proceeds this fiscal and then "reverse" it based on your actual gain/loss in the next fiscal? Or do you simply book the actual gain/loss when you buy back the stock?


Since you don't know your average cost basis until the stock is bought back, you can't calculate your gain or loss. Right now, it would be a mark to market loss for me. I could buy it back now and book the loss this fiscal year although, it is not a very large amount and then I would have to wait 30 days before re-entering the position to avoid a superficial loss.   



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That is an excellent question.  The best place to start is with Interpretation Bulletin IT-479R- Transactions in Securities,




Securities transactions will be taxed either as an income gain or loss or as a capital gain or loss.  Once a person has "elected" his tax treatment it must be consistently followed year after year.  To determine the correct way to treat a short sale we must review paragraph 6, which states,


6. The election under subsection 39(4) is applicable only to "Canadian securities". This term is defined in subsection 39(6) as a security (other than a prescribed security) that is a share of the capital stock of a corporation resident in Canada, a unit of a mutual fund trust (applicable to 1979 and subsequent taxation years) or a bond, debenture, bill, note, mortgage, hypothec or a similar obligation issued by a person resident in Canada.  A Canadian security includes such a security that is sold short.  The term "a prescribed security" is defined by section 6200 of the Regulations.


How I interpret the above is, at least for a Canadian security, a long stock position is treated exactly the same as a short stock position.  You only are required to book the gain or loss when you buy back the shares.  No "mark to market" is required to be reported at the end of the year.


Of course, there is always a fly in the ointment which is paragraph 18,


18. The gain or loss on the "short sale" of shares is considered to be on income account.


Regardless of whether you must treat the gain or loss of a short sale as capital or income, this bulletin indicates that you are not required to "mark to market" at year end. 


Regarding my answer there are no guarantees in life, except death and taxes  :)



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