You may have an investment in some shares or debt which has become worthless, but you can’t sell them because the security is no longer listed on a stock market. There is a section of the Income Tax Act that allows you to claim a capital loss on these shares or debt even though you cannot sell them. This section also applies to debt owed by a corporation to a taxpayer.
Subsection 50(1) deems a taxpayer to have disposed of a debt or a share of a corporation at the end of a taxation year for nil proceeds and to have reacquired it immediately thereafter at a cost of nil if:
||in the case of a debt (other than a debt from the sale of personal use property), the debt is owing to the taxpayer at the end of the taxation year and it is established by the taxpayer to have become a bad debt in the year; and|
|in the case of a share (other than a share received as consideration from the sale of personal use property), the taxpayer owns the share of the corporation at the end of the taxation year and the corporation:
Because of the s. 50(1) election, the superficial loss rules do not apply, even though you are deemed to have immediately reacquired the shares.
A cease trade order in itself will not qualify shares for a s. 50(1) disposal election. The above conditions must be satisfied.
If s. 50(1) applies, you are deemed to have disposed of the shares for nil proceeds, and can elect to claim a capital loss for those shares, for the amount that you paid for them. Unless the loss qualifies as a business investment loss, you will do this by recording the deemed disposal of shares on Schedule 3 of your tax return, as if you had actually sold the shares or debt for nil proceeds. Disposal of shares are recorded in part 3 of Schedule 3, and disposal of bonds or other corporate debt are recorded in part 5 of Schedule 3.
You must also file an election in writing with your tax return, as indicated in T4037 Capital Gains. If you file your tax return electronically, send the letter separately to Canada Revenue Agency (CRA), indicating that it is in support of your electronically filed tax return. The letter should state that you want subsection 50(1) of the Income Tax Act to apply to the particular transaction. Include your full name and address, as well as your social insurance number, and ensure that you sign the letter. Make sure you have documentation which shows that the shares or debt qualify as a s. 50(1) disposal, which you will be required to provide if requested by CRA.
The advantage of this is that the taxpayer can write off the investment while still retaining ownership. The corporation may “revive”, and be worth something in the future. Any recovery of amounts previously deducted would have to be included as capital gains.
There may be other ways to dispose of the investment to realize a loss. You could give them to a family member, other than a spouse. You could contact your financial institution or brokerage to see if they have a method for you to dispose of delisted shares, or shares which are worthless or near worthless. They may purchase the investment from you for a nominal fee, which will provide you with a transaction receipt as proof of sale. Using either of these methods, of course, you will not retain ownership.