CRA indicates that recognizing a s. 50(1)(b) loss on shares does not trigger a s. 7(1.1) benefit
Where an arm’s length employee of a Canadian-controlled private corporation (“Opco”) acquires shares under a stock option, the resulting benefit (which is added to the adjusted cost base of the shares under s. 53(1)(j)) will not be triggered if the employee elects under s. 50(1)(b) to recognize a capital loss in the year Opco goes bankrupt, whereas such benefit will be triggered when Opco ultimately is wound up and its shares cancelled. Symmetry is achieved assuming that the employee qualified for the s. 110(1)(d.1) deduction and the capital loss qualified as a business investment loss. CRA did not address the scenario where the shares of the bankrupt corporation are never cancelled.
Neal Armstrong. Summary of 28 May 2018 External T.I. 2017-0692931E5 under s. 7(1.1).