Unfortunately, there may be times when an investment in shares held in your portfolio is deemed to be valueless. This could be a result of a company becoming insolvent, bankrupt or even delisted from a public stock exchange. Generally, a capital loss for income tax purposes cannot occur without an actual sale or disposition. In the situations noted previously, an actual sale or disposition may never occur and in the absence of subsection 50(1), a loss may never be realized.
Subsection 50(1) allows a taxpayer to elect to claim a capital loss in situations where valueless shares have not been sold or disposed of as long as certain criteria are met. This election is often misunderstood and overlooked and is why we are bringing this to your attention today.
To qualify for this election, the following conditions must be met:
The corporation must have become formally bankrupt or insolvent during the year, or at the end of the year,
the corporation is insolvent in fact,
neither the corporation nor a corporation controlled by it carries on business,
the fair market value of the shares is nil, and
It is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on business.
An election must be made in the year to which the election relates. There is no prescribed form for this election. It must be made in writing stating the taxpayer wants to elect for subsection 50(1) to apply and filed by the due date of the return for the year. It is imperative this election is filed and done so in a timely manner. Failure to do so will result in the loss being denied and/or significant penalties.
In certain situations where an election has been made and during the 24 month period immediately following the disposition, the corporation or a corporation that controls it carries on business, a deemed disposition equal to the original cost based will result. This will create a capital gain equal to the capital loss claimed via the election, essentially offsetting the capital loss. As a result of this rule, unplanned tax implications could occur.
This is a complicated area of taxation and should be considered with the assistance of a professional tax advisor.
For more information, please contact email@example.com or 1 844-GYTD-CPA