Claiming Capital Loss from a Delisted Stock

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(Even though the following info is for Canadians, U.S. residents may find some good ideas to research further)

By FrugalTrader, December 1, 2009
With Nortel becoming delisted, there are thousands of investors out there still holding the delisted stock.  So what happens next?  How do you claim the capital loss?

As I’m not a tax expert, I contacted Tax Guy to help me out with that question.  Here is what he came back with.

If you own shares of a company that are worthless because the company is bankrupt (under the Bankruptcy & Insolvency Act) or is being wound up (under the Winding-Up and Restructuring Act), you can elect to have a deemed disposition and re-acquisition at nil value (essentially you are considered to have sold the shares for $0 and then re-purchased them again for $0).

Even if the company has not officially declared bankruptcy you can still make the election if:  

• The company is insolvent (i.e. it has defaulted on its loans and cannot pay it’s debts);  
• It has ceased operating (this is different than de-listing or ceased trading);   
• The shares have a nil market value (in this case its shares, traded on a stock exchange or not, are worthless); or  
• It is reasonable to expect that the corporation will be dissolved or wound up and will not carry on business in the future

Any of these conditions allow you to claim a capital loss. If the shares ever regain value again, the adjusted cost base (ACB) is $0 and you will have a capital gain when you actually sell them.

A note about de-listing: Just because a stock has ceased trading or has been de-listed from a stock exchange does not itself mean that a deemed disposition can be claimed. It is possible to de-list or cease trading and continue operations.

The Process Of Claiming The Loss
It is important to remember that if you have worthless shares in an RRSP, RRIF or TFSA (registered accounts), then you cannot claim a loss at all.

If the shares were held outside a registered account, then you report the capital loss using Schedule 3 of the Federal Income Tax return. You must also file an election in the form of a written letter indicating that you are claiming a deemed disposition under subsection 50(1) of the Income Tax Act.

There you have it, for all those investors still holding Nortel stock in a non-registered investment account, you can claim the capital loss (assume sold at $0) by using Schedule 3 of the Federal Income Tax Return.