28 April 2006 Ministerial Correspondence 2006-0175701M4 - Allowable Capital Losses

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 a paragraph 50(1)(b) disposition arises as a result of the issuance of a cease trading order.

Position: This is a question of fact.

Reasons: The issuance of a cease trading order by a securities regulator does not necessarily imply that a company is bankrupt, wound-up, or insolvent and out of business as contemplated under paragraph 50(1)(b) ITA.

XXXXXXXXXX 								2006-017570

April 28, 2006

Dear XXXXXXXXXX:

Re: Allowable Capital Losses

This is further to our telephone conversation of March 31, 2006 regarding your concerns about the process for claiming a capital loss. I propose to address the issue from a taxation point of view, as I understand that officials from Industry Canada will be replying to your concerns from a corporate governance perspective.

In your initial correspondence you indicated that the Ontario Securities Commission issued a cease trading order against a corporation, in which you had purchased shares. You expressed concern that despite the trading suspension you have been unable to claim a capital loss.

Please note that a trading suspension mandated by a provincial securities commission does not automatically suggest that the company is out of business. For instance, a cease trading order may be issued when the share value falls below a certain minimum threshold; nevertheless, the company may continue to carry on business.

The provisions of paragraph 50(1)(b) of the Income Tax Act stipulate the conditions under which capital losses in respect of shares can be claimed. In this regard, the Act contemplates any one of following possibilities, namely, the corporation is bankrupt, wound-up, or at the end of the year it is insolvent, out of business, its shares have a nil market value, and it is reasonable to expect that the corporation will be dissolved or wound-up and will not carry on business in the future.

The foregoing circumstances are all fact driven situations and the CRA has no way of tracking them. Moreover, the taxpayer confidentiality provisions of section 241 of the Income Tax Act preclude the CRA from divulging taxpayer information to an investor about a status of a corporation in which the investor holds share capital. Under the self-assessing system of taxation as we have in Canada, it is up to the taxpayer to provide the CRA with the facts to substantiate that the provisions of paragraph 50(1)(b) apply.

Along with your initial correspondence you were kind enough to share information that you had received from the Ontario Securities Commission, wherein it was suggested that you contact the CRA. That recommendation, however, was premised, and rightly so, on you having a clear understanding of the status of the company. In this regard, you may wish to contact the Registrar of Companies in whatever jurisdiction the company was incorporated.

You should note that the incorporation of companies with provincial objects falls under provincial jurisdiction. Accordingly, you would need to determine which jurisdiction was involved. The Ontario Securities Commission may be able to assist you in this matter. Alternatively, that information might be obtainable from the broker that transacted your share purchase. A further source of information would be the transfer agent whose principal responsibility is to manage the company's share register. Ultimately, it will be at your discretion to choose the means for determining which jurisdiction governed the incorporation of the company in which you invested.

Once you have established the applicable jurisdiction, you may want to contact the Registrar of Companies in that jurisdiction to determine whether the company is still filing annual information returns or if it has been wound up or otherwise dissolved. If annual information returns were still being filed, this would be an indication that the company is still carrying on business.

On the other hand, if the information returns are not being filed, this may be an indication that the company is no longer in business; however, this would not be conclusive proof. While some companies are, indeed, wound-up or otherwise dissolved, there are a large number of instances where the companies are merely abandoned, frequently leaving the capital investors without recourse. Eventually, however, the charters of such companies are cancelled for failure to file information returns. The corporate legislation governing these situations can differ depending on the incorporating jurisdiction.

In closing, I can only suggest that you contact the applicable Registrar of Companies to determine the status of the company. If it is still filing the annual information returns, you may wish to communicate directly with the company at its head office, as indicated on the information return. If, on the other hand, you find that the status of the company is such that it meets the provisions of paragraph 50(1)(b) you might be in a position to claim a capital loss.

In the event that you were to determine that you were eligible to claim a capital loss, I have taken the liberty of enclosing a copy of our 2005 Capital Gains Guide to assist you in the treatment and reporting of such a loss. I trust that the foregoing explanation has addressed your concerns from a taxation point of view.

Yours truly,

Bob Skulski
Manager
Business Incentives and
Capital Transactions Section
Income Tax Rulings Directorate