Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether there is some mechanism where you can claim the capital losses incurred in respect of the shares that are essentially worthless but cannot be disposed of because of a cease trading order.
Position: Yes.
Reasons: Subsection 50(1) of the Income Tax Act allows a taxpayer to elect to have a deemed disposition of a share of the capital stock of a corporation in the return of income for the year in certain situations.
Charles Rafuse
XXXXXXXXXX (613) 957-8967
2005-015027
November 24, 2005
Dear XXXXXXXXXX:
Re: Shares of bankrupt corporations
We are writing in response to your letter of September 2, 2005, concerning certain shares that were purchased before 2000. The shares have since declined in value to the point where they are essentially worthless. Your broker, XXXXXXXXXX, has advised you that the stocks cannot be disposed of due to "cease trade" orders connected with bankruptcy proceedings. You have asked whether there is some mechanism where you can claim the capital losses incurred in respect of these stocks for income tax purposes.
Written confirmation of the tax implications inherent in real transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. However, we are prepared to provide you with the following general comments.
Provided you owned the shares at the end of the taxation year, subsection 50(1) of the Income Tax Act (the "Act") allows you to elect to have a deemed disposition of the shares in your income tax return for the year in certain circumstances. The first situation is where the corporation becomes bankrupt during the year, within the meaning assigned by the Bankruptcy and Insolvency Act. Another situation is where the corporation is a corporation referred to in Section 6 of the Winding-Up & Restructuring Act that is insolvent and in respect of which a winding-up order under that Act has been made in the year. For your information, the Bankruptcy and Insolvency Act and Winding-Up & Restructuring Act contain definitions for specific words used in subparagraphs 50(1)(b)(i) and (ii) of the Act. You should refer to those definitions before determining whether the conditions in the Act have been met. The third situation described in subparagraph 50(1)(b)(iii) is where the corporation is insolvent, 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 start to carry on business. The word "insolvent" should be given its ordinary meaning since this term is not defined in the Income Tax Act. In this regard, the dictionary definition of "insolvent" is "unable to pay its debts". The situations and test contained in subsection 50(1) of the Act are independent of the "cease trade order" described in your letter.
Where one of the described situations arise, you may elect under subsection 50(1) for the year to have the share deemed disposed for nil proceeds and reacquired immediately after the end of that year at a cost of nil. You should specify the year in which the election pertains to. If subsection 50(1) applied, in effect, a capital loss is recognized on those shares. If in some future year, the shares were disposed of for proceeds greater than nil, the gain would be reportable as a capital gain.
We trust this information is helpful.
Yours truly,
Suzanie Chua
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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