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A Primer on Delisted Stocks

A few months back, an elderly acquaintance, after hearing about my interest in personal finance, asked if I could find some information on a stock that he held. He said that he purchased the stock over 20 years ago and could not even remember the name of the company. He said that he had the stock certificate somewhere and that he would find it for me, if I could find some details about the stock. He was concerned that the company may not even exist today. Unfortunately, he never got back to me about the topic. He moved away recently and so, my chances of knowing about that company are slim. But, his request got me interested in delisted stocks, which we will discuss in detail below.

Listing a Stock

When we buy or sell stocks on any of the major stock exchanges, we seldom think about the criteria that those companies would have had to meet to be able to be listed on the exchange. Being listed on a major exchange makes a company’s shares easily accessible to traders and investors and enhances their reputation.

Nonetheless, there are standards that are set by every exchange that have to be met before approval for listing. Some basic conditions include a certain minimum number of shareholders, shares, and price (dependent on the exchange) that must be satisfied to go with other regulatory requirements. As would be evident, these standards are set to filter out the bad apples and retain only the good corporations with stable records and credible management. These measures become necessary to maintain the reputation of the exchange.

What is Delisting?

Once listed, corporations are still required to maintain certain standards to prove their ongoing adherence to exchange regulations. When a company fails to meet one of the required standards (minimum number of shares, share price, shareholders’ equity, etc.), then an exchange will initiate proceedings to remove the stock from its list, which is termed as delisting. Typically, the ignominy of being booted from a stock exchange is a precursor to the corporation’s demise.

What Happens after a Stock is Delisted?

When a stock is delisted, it does not mean that the company has gone bankrupt. The company is probably still conducting operations though the financial performance may not match its recent past. Such companies are still traded but in a different way.

In Canada and the US, delisted microcap (penny) stocks can be traded as Over The Counter Bulletin Board (OTCBB) stocks or pink sheets. OTCBB stocks are subjected to little regulation and are allowed to trade as long as they stay current with their filings. Pink sheets are riskier than OTCBB stocks as they are not registered and simply offer a quote. Both these types of stocks are highly speculative and characterized by low liquidity.

What about the investor?

As FrugalTrader wrote a while back, such a penny stock investor is likely to be in a situation where they have to look at claiming a capital loss, if the investment was in a taxable account. In the unlikely event of a company managing to do well after being delisted, it still would be difficult to regain the lost reputation.

Have you held a stock that was delisted? Did you manage to trade it as an OTCBB stock or pink sheet? Did you notice that the price dropped further after delisting?

About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.  You can read his other articles here.

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About the author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.

{ 15 comments… add one }
  • Renzo Isabella March 7, 2012, 11:20 am

    A significant consequence can occur if the delisted stock was held in a registered account (such as an RRSP or TFSA) – if a stock is delisted it may no longer qualify for investment in registered accounts. The Income Tax Act imposes a penalty of 1% per month for holding non-qualified investments in most registered accounts.
    If someone were to end up in this situation, I would strongly recommend seeing a good tax lawyer to see if the tax would apply, and what you can do about it.

  • James March 7, 2012, 12:59 pm

    I was able to convert my NT shares (had the certificate) to street, and sell them on the OTC in the summer.

    5.6 cents a share.

  • Clark March 7, 2012, 2:47 pm

    @James: Did you phone your broker to execute such an OTC trade?

  • On Demand March 7, 2012, 4:24 pm

    I owned a delisted stock (American bullion mineral) a junior gold mining stock. But got 10 fold back after the class action lawsuit to the major shareholder. Just don’t give up hope to get your money back.

  • Joe March 7, 2012, 7:45 pm

    @James wow that must have hurt man :( At a nickle per share did you consider, instead of selling, just using the tangible certificates to start a bonfire?

  • James March 8, 2012, 7:59 pm

    responses:

    I had the paper certificates because I was paranoid that my full service broker (that exercised my options at 120.43 and recommended I hold on margin, in 2000) would dispose of them for me to save me the grief, and thus trigger a huge tax bill on the capital gains deferral. I had to open an account with BMO as this was the only discount brokerage that could accept the physical certificate* and convert it to street. I sold them via their online tool.

    It hurt. But not as much as the margin call back in 2003, and all the worry about some forced disposition triggering the huge tax bill. Thanks to Harper for putting that Relief Election in the 2011 budget! Though, if I burned them, I wouldn’t be able to remit fair market value at time of disposition and could not make the election…. that would have been WAY worse.

    * TD, my bank, and generally great would not do this for me, even though I have appreciable assets with them. They could sell them OTC, they just couldn’t accept the certificate into my SD account. Someday, I’ll hope to be in a situation to remind them how upset I was.

  • DylantheBlogger March 19, 2012, 11:32 pm

    I held some Nortel and another company called plaintree. It used to trade under the symbol LAN on the TSX sold that through a brokerage account for less han the commission, brokerage waved the full commision so i didn’t actually go negative on the sale. I just wanted to use the tax loss and get it out of my account.

  • Joe March 20, 2012, 5:38 am

    What is the tax impact of a delisted stiock – is its treated as an automatic sale for purposes of calculating a capital loss or gain?

  • Renzo Isabella March 20, 2012, 11:48 am

    No, you don’t have a sale for calculating a capital loss or capital gain until you have a disposition, and de-listing is not considered a disposition. But as my comment above reads, you could have a tax consequence if you held the stock in a registered (such as an RRSP or TFSA) account. It will no longer be a qualified investment, and a tax of 1% per month will apply.

  • Ed Rempel March 21, 2012, 1:12 am

    Hi Joe,

    You can claim a capital loss if your company becomes worthless. Being delisted is not enough on its own, but if a company becomes worthless, you cannot sell the shares.

    In that case, you can claim a capital loss assuming selling price is zero.

    For details, see: https://www.milliondollarjourney.com/claiming-capital-loss-from-a-delisted-stock.htm .

    Ed

  • S April 24, 2012, 3:47 am

    If I have a delisted stock in a TFSA then transfer it into my non-registered account, could I then claim a capital loss?

  • Renzo Isabella April 24, 2012, 9:35 am

    @S

    No, when you transfer a stock out of a registered account (such as a TFSA), you are deemed to have recognized your gain or loss immediately before it leaves the account. So the loss would be “stuck” in your TFSA, and not claimable.

  • TimV June 13, 2012, 3:27 am

    Renzo: I understand your expertise in tax planning, but what is your source for asserting that a 1% tax would apply to a delisted stock held in a registered account? The IT-320R3 from the CRA states:

    “Shares of a corporation that were listed on a prescribed stock exchange but that have been suspended from trading or de-listed continue to be qualified investments if the corporation that issued the shares was, and remains, a public corporation, and the shares do not otherwise cease to be qualified investments.”

    Why does the above from IT-320R3 not mean what it seems to mean?

  • Renzo Isabella June 13, 2012, 12:02 pm

    Tim,

    You’ve pointed out the perils of my simplifying what is a more complex analysis.

    A share can be a qualified investment if it is a share of a public corporation. There are many ways to be a public corporation, one of which is to have any class of shares traded on a designated stock exchange. This means that you can own shares of a class that are not traded on a designated stock exchange in a registered account (including shares that are de-listed), if the corporation has at least one other class of shares that are still traded on a designated stock exchange.

    Another way to be a public corporation, without having any shares trading on a designated stock exchange, is if you formerly had a class of shares trading on a designated stock exchange. However, this mechanism for continuing to be a public corporation comes with conditions.

    (1) The corporation cannot have filed an election to not be a public corporation, or
    (2) The CRA cannot have designated the corporation not to be a public corporation.

    This second condition means a corporation can automatically not be a public corporation, and therefore investments in it will not be qualified investments. There are certain requirements that the corporation must meet in order to request or be designated not to be a public corporation.

    Now, why would a corporation not want to be a public corporation? The tax system provides many concessions to non-public corporations, often to compensate for the fact that the corporation does not have easy access to capital the way public corporations do. A non-public corporation that is a Canadian-controlled private corporation may be entitled to the small business deduction, for example.

    Therefore, once a share has been delisted, there is a very real risk that the share will no longer qualify for registered accounts. As the CRA points out, it is not necessarily automatic, but from an investor’s point of view, you do have to start paying extremely close attention to any delisted shares in a registered account, as they can become non-qualified either by request, or by designation by the CRA.

  • eljay October 28, 2016, 1:38 pm

    I have shares of a company in my TFSA that were delisted from the TSX in 2015 and are about to be relisted on the TSX-V, likely in a few weeks.
    The company is registered in Jersey, headquartered in Peru. Used to be Canada for both.
    I don’t want to sell in the foreseeable future.
    What are the penalties if I leave them in vs move them out before relisting?

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