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My question is almost identical to this one, only I am interested in the Canadian version.

If I own a mutual fund (for example, TDB900 from TD Bank) and wish to replace it with an equivalent ETF (for example, the FTSE Canada All Cap Index), do I have to be careful of the superficial loss (or gain) rules? More specifically, how do I determine if an ETF is substantially the same as a mutual fund?

Background: I am seeking to replace mutual funds with ETFs because of lower fees. I am indeed seeking ETFs that are identical or almost identical to my current mutual funds. I expect to realise a gain on most of my mutual fund sales.

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No it won't be a superficial loss. The words used in the ITA(54) say

“superficial loss” of a taxpayer means the taxpayer’s loss from the disposition of a particular property where

(a) during the period that begins 30 days before and ends 30 days after the disposition, the taxpayer or a person affiliated with the taxpayer acquires a property (in this definition referred to as the “substituted property”) that is, or is identical to, the particular property, and

For the interpretation of 'identical' you can read IT 387. They say

¶ 1. "Identical properties", for the purposes of subsection 47(1), the definition of "superficial loss" in section 54 of the Act and subsection 26(8) of the ITAR (and subject to the provisions referred to in ¶ 5 and ¶s 9 to 11), are properties which are the same in all material respects, so that a prospective buyer would not have a preference for one as opposed to another. To determine whether properties are identical, it is necessary to compare the inherent qualities or elements which give each property its identity. Such a determination is a question of fact which must be decided on the basis of the relevant details in each situation.

Since your 2 choices aren't even the same type of structure (MF vs ETF), they follow different indices, they charge different fees, etc.. , you will have no problem.

With the proliferation of security choices in Canada there is never any need to run afoul of the rules. Even if you don't want to wait 30 days, you can switch to a similar choice and then switch to the identical choice.

One day I imagine we will even have switching with no capital gains tax, like we were promised.

You can also take advantage of all the low cost ETFs to delay paying capital gains tax by using a different fund near the time of withdrawal. The only capital gains payable will be based upon the last bought fund. This is similar to US law that allows tax lots.

Just be careful not to buy, or have bought, the same identical property in another account, by you or your spouse, in the last or next 30 days, if you have a loss. Especially tax advantaged accounts.

BTW, there's no superficial gain rule.

  • Thank you for your detailed answer complete with references. Much appreciated! – ChrisInEdmonton Jun 29 '14 at 14:40

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