If you transfer an investment into a register account, it bears mentioning this deemed disposition will not trigger a tax-deductible capital loss due to the superficial loss rules.
When a stock goes bankrupt, Jake, you can claim a capital loss, even though you might not be able to sell the shares. According to the Canada Revenue Agency (CRA):
In the case of a share in a corporation… the taxpayer must own the share at the end of the tax year and the corporation must:
- have become bankrupt in the tax year;
- be a corporation referred to in section 6 of the Winding-up and Restructuring Act that was insolvent within the meaning of that Act and for which a winding-up order under that Act was made in the tax year; or
- be insolvent at the end of the tax year, and, at that time, it must also be that neither the corporation, nor a corporation it controls, carries on business. In addition, at that time, the share must have a fair market value of nil and it must be reasonable to expect that the corporation will be dissolved or wound-up and will not commence to carry on business.
So, a bankrupt company should qualify, Jake. And to claim the loss, you need to file an election in writing by including a letter with your tax return in the year of the claim that you are making an election under Subsection 50(1) of the Income Tax Act.
Some brokerages will purchase the stock from you for a nominal amount. And they may charge an administration fee, but this can also allow you to claim the loss and receive an official tax slip (a T5008) that shows the disposition. It also means you do not have to look at the worthless security in your account for years to come.
You can claim capital losses to reduce capital gains incurred in the same year. If your losses exceed your gains in a tax year, you can also carry losses back up to three years to offset previous capital gains. And net capital losses can also be carried forward indefinitely to use in the future against capital gains.
Allowable business investment losses (ABILs)
If you own shares of a bankrupt company that was a private company, you may be able to claim an allowable business investment loss (ABIL) instead of a capital loss. The company must be a small business corporation (SBC).
According to the CRA:
This is a Canadian-controlled private corporation in which all or most (90% or more) of the fair market value of its assets:
- are used mainly in an active business carried on primarily in Canada by the corporation or by a related corporation
- are shares or debts of connected corporations that were small business corporations
- are a combination of these two types of assets
If subsection 50(1) of the Income Tax Act applies—basically, if the company is bankrupt or insolvent at the end of the year—you can claim an ABIL on a small business corporation, Jake.