Claiming Capital Loss from a Delisted Stock
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 it’s 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.
Thanks again to Tax Guy for taking the time to help me out.
10 Comments, Comment or Ping
1. saveING.ca This is why I signed up with ING Direct
wow thanks for that, dunno if I can go back to the Laidlaw bankruptcy…
Dec 1st, 2009 @ 10:50 am
2. noob
Interesting post, I wonder what happens when a company gets aquired, the stock gets delisted and you are given shares of another company.
This happened with Sirf in the US which got bought out buy a Brit company called CSR. Now all the old SiRF shareholders had their shares exchanged for CSR stock and some cash. I wonder if this kind of transaction can trigger a deemed disposition.
We also have a similar situation with the upcoming Encana Split. Can a split be a deemed disposition?
FT, do you reckon we can get the Tax guy to help out with this question as well?
Dec 1st, 2009 @ 11:38 am
3. Jerry Hung
Just want to add something, keep in mind commission to sell a de-listed stock may be higher than the normal lot
e.g. I sold my Lehmans Brothers (LEH) stock in TDW (via the phone) which wanted $43 commission, after some easy bargaining they did it for $9.99
Add that to the capital loss for 2009
Dec 1st, 2009 @ 9:58 pm
4. Tax Guy
@ FT – Thanks for the mention! I do appreciate it.
@ ING – You’re a little late. Laidlaw went bankrupt in the 1990’s.
@noob – An acquisition involving two non-Canadian companies can be tricky. The Canadian Tax Act has a whole host of provisions about amalgamations and normally tax deferred rollovers apply to Canadian companies only and is not always automatic. If you can’t figure out the consequences of an amalgamation of two companies, treat as a sale of one and purchase of he other.
You’d be wise to pay attention to the information circulars coming from Encana to ensure you are aware of the tax implications. Chances are it will be a tax deferred rollover, but be viligent!
@ Jerry Hung – The commission paid on the disposition is deducted from your proceeds of the sale and decreases your capital gain or allowable capital loss. If the company was legally bankrupt you are in a position to claim a deemed sale at nil and realize a loss.
Dec 1st, 2009 @ 10:56 pm
5. Kinny
Can someone provide an example?
For example, let’s say I have 100 Nortel shares (which I bought it for, let’s say $5/share back then) and I elect to sell them @ $0 and re-purchase them @ $0. How do I fill out the Schedule 3 form? I’m a little confused.
Thanks!
Dec 2nd, 2009 @ 9:56 pm
6. Tax Guy
@ Kinny
Fill out schedule 3 in the appropriate spaces. In your example, you should report a capital loss of $500 of which $250 is an allowable capital loss. You attach a signed letter indicating you are making an election on Nortel.
If you look at the 2008 form, you fill in section 3. Column 2 is $0, Column 3 is $500 and column 5 is ($500). If you have nothing else to report on this form you report ($500) on line 197 and $250 on line 199.
Dec 2nd, 2009 @ 10:40 pm
7. rob22
when you claim capital loss …for the dlisted company..attach a note saying to CRA you want to claim under section 50..
Dec 3rd, 2009 @ 6:02 pm
8. ghostryder
I hate to disappoint you but I don’t think Nortel is going to qualify under Sec. 50(1) of the ITA.
It is not bankrupt, it is under CCAA creditor protection and undergoing restructuring. It is not technically bankrupt.
It is not being wound up under Sec 6 of the winding up act.
And with respect to the 4 bullets above, if you read the ITA Sec. 50(1)(iii) it says:
(iii) at the end of the year,
(A) the corporation is insolvent,
(B) neither the corporation nor a corporation controlled by it carries on business,
(C) the fair market value of the share is nil, and
(D) it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on business
Note the key word in (C). AND (not OR as TaxGuy posted). You have to meet ALL 4 conditions. Not just one of them. At this point it probably only meets (A).
Dec 4th, 2009 @ 3:11 am
9. boomtrader
Very good info.
You also need to advise your broker or brokerage firm that you wish to trigger the capital loss of your defunct stock and repurchase it.There is also a fee to do this.
Boomtrader
Dec 6th, 2009 @ 10:31 am
10. CGA
I just spoke to CRA regardng nortel who confired what tax guy said using section 50(1)
Mar 16th, 2010 @ 11:51 am
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