The stop-loss rules in the Income Tax Act restrict or grind a capital loss on shares in defined circumstances, generally where a loss has been generated in a way the Act treats as artificial or duplicative. The principal provisions include subsection 40(3.6), which addresses losses on share redemptions, and section 112(3), which can grind a loss by the amount of certain tax-free dividends received on the shares.
These rules are frequently encountered in post-mortem loss-carryback planning under subsection 164(6). Where an estate redeems shares to create a loss to carry back against the deceased's terminal-year gain, but the estate continues to hold shares of the same corporation, the stop-loss rules can reduce the loss available. Structuring around them is a routine part of post-mortem and corporate-distribution planning.