(The info here applied to Canada; U.S. residents may find some ideas for further research)
Arthur Drache, Financial Post, Dec. 03, 2002
All too many of us are becoming familiar with the claiming of capital losses these days.
Problems may arise in situations where there has been no disposition because the security is worthless. And as many readers are aware, there have been an awful lot of companies that have gone bankrupt or have become insolvent while the securities are in investors' portfolios.
Subsection 50(1) of the Income Tax Act attempts to come to grips with this situation. Where the investor holds debt or shares of a company that has become insolvent, he or she can make an election to treat the security as having been disposed of for income tax purposes, thus triggering the capital loss. Normally this is done simply by appending a letter to the return making the claim and making a reference to subsection 50(1).
That having been said, you may be called upon to prove that the company has in fact become bankrupt (which status can be checked with Industry Canada) or is insolvent. The latter status, of course, might be much harder to prove, given that insolvency is not a state which is "registered" anywhere. Data to support your presumption of insolvency should be retained against the possibility of a future tax audit.
If there is an election made under subsection 50(1), the deemed disposition means that the investor continues to own the worthless security and if, by some miraculous change of event, the securities have some value in the future, there is a potential gain which could be subject to tax from an ACB of zero.
Of course, another way to realize the loss is to simply dispose of the shares to a third person. But this too has some technical problems.
First, these days almost nobody gets share certificates that could be "signed off" and transferred to the third party. Presumably, some sort of document might be drawn up evidencing a sale or gift to that person. The technical problem is exacerbated by the fact that given the circumstances, it is almost certain that the change of ownership can never been shown on the books of the company in question -- which is the usual evidence than a transfer has taken place.
Where the shares are held within a portfolio managed by a broker, the recommended step is to have the broker delete the holding from the regular statement of holding. We have been told that some brokers, such as RBC Dominion Securities, will send a letter, if requested, saying that the security has been eliminated from your account because the company is bankrupt or insolvent.
One would hope that in most cases, a claim using the subsection 50(1) election will not be challenged by the Canada Customs and Revenue Agency. But as with all dealings with the tax authorities, it is best not to assume that all will go well and, to be prudent, retain a record of the rationale for the claim until such time as reassessment for that tax year becomes statute barred (usually three years after the date of the initial notice of assessment).
All too many of us are becoming familiar with the claiming of capital losses these days.
Problems may arise in situations where there has been no disposition because the security is worthless. And as many readers are aware, there have been an awful lot of companies that have gone bankrupt or have become insolvent while the securities are in investors' portfolios.
Subsection 50(1) of the Income Tax Act attempts to come to grips with this situation. Where the investor holds debt or shares of a company that has become insolvent, he or she can make an election to treat the security as having been disposed of for income tax purposes, thus triggering the capital loss. Normally this is done simply by appending a letter to the return making the claim and making a reference to subsection 50(1).
That having been said, you may be called upon to prove that the company has in fact become bankrupt (which status can be checked with Industry Canada) or is insolvent. The latter status, of course, might be much harder to prove, given that insolvency is not a state which is "registered" anywhere. Data to support your presumption of insolvency should be retained against the possibility of a future tax audit.
If there is an election made under subsection 50(1), the deemed disposition means that the investor continues to own the worthless security and if, by some miraculous change of event, the securities have some value in the future, there is a potential gain which could be subject to tax from an ACB of zero.
Of course, another way to realize the loss is to simply dispose of the shares to a third person. But this too has some technical problems.
First, these days almost nobody gets share certificates that could be "signed off" and transferred to the third party. Presumably, some sort of document might be drawn up evidencing a sale or gift to that person. The technical problem is exacerbated by the fact that given the circumstances, it is almost certain that the change of ownership can never been shown on the books of the company in question -- which is the usual evidence than a transfer has taken place.
Where the shares are held within a portfolio managed by a broker, the recommended step is to have the broker delete the holding from the regular statement of holding. We have been told that some brokers, such as RBC Dominion Securities, will send a letter, if requested, saying that the security has been eliminated from your account because the company is bankrupt or insolvent.
One would hope that in most cases, a claim using the subsection 50(1) election will not be challenged by the Canada Customs and Revenue Agency. But as with all dealings with the tax authorities, it is best not to assume that all will go well and, to be prudent, retain a record of the rationale for the claim until such time as reassessment for that tax year becomes statute barred (usually three years after the date of the initial notice of assessment).
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