Why does Canada's superficial loss rule also include a clause for "30 days before the sale"?

Question

According to the Canadian Revenue Agency:

A superficial loss is when 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

I understand the straightforward reasoning for "30 calendar days after the sale", but what is up with "before the sale"?

Could someone please explain the significance of this clause and when it should be applied?

Answer 1

There is a simple reason why the the 30 day period extends in both directions. It becomes clear once you define the timeline of events.

Lets pretend that the superficial sales rules didn't exist.

Most people who want to lock in the loss would prefer to make the time period between the sale and repurchase instantaneous. The timeline would look like this:

• day 1: bought 100 shares at $100
• Many days later: sold 100 shares at $80
• 10 seconds later: bought 100 shares at $80
• Many days later: sold 100 shares at some other price.

They are afraid if they waited a day they could miss a jump in price.

If the law only addressed the situation where the repurchase was done after the selling of the shares, then people would get around it by doing the following:

• day 1: bought 100 shares at $100
• Many days later: bought 100 shares at $80
• 10 seconds later: sold 100 shares at $80
• Many days later: sold 100 shares at some other price.

To close the loophole the law makes the required waiting period 30 days in either direction.

Answer 2

The answer by mhoran_psprep gives a very good example, but I'll explain more about the rationale of the concept.

Similarly to the US wash sale rules, in Canada the law prohibits tax loss harvesting as the sole rationale for the transaction. In the US this is because the short term capital loss is more valuable than long term capital loss, and both in the US and Canada this because capital loss offsets capital gain for tax purposes and tax loss harvesting allows deferring taxes. The tax agencies want to avoid this.

In some other countries there are no such rules, and in fact taxpayers are allowed to do tax loss harvesting even without selling the assets, just by resetting the cost basis. The existence of wash sale rules is a matter of public policy.

As the other answer explains, the rules are written in a way that removes the ordering of the events from the equation. It doesn't matter in what order you sold the loss or repurchased the asset, as long as it is done in a reasonable proximity to each other (within 30 days either direction), you're on the hook. The assumption is that it is much harder to anticipate market moves for the period of multiple weeks than it is for a period of days or hours (or seconds), this imposing such a period removes the incentive of tax loss harvesting being the only rationale for the transaction.