You may have an investment in some shares or debt which have become worthless, but you can’t sell them because the security is no longer listed on a stock market.  There is a section of the Income Tax Act that allows you to claim a capital loss on these shares or debt even though you cannot sell them.  This section also applies to debt owed by a corporation to you.  Therefore, you could potentially receive a large tax refund by triggering a tax loss without having to incur any cost at all.

This is a popular tax strategy.  For example, if you hold shares or debt of a corporation that is worthless, without actually having to sell them you may be able to simply make an “election” under Subsection 50(1) of the Income Tax Act to have a deemed disposition of the shares or debt for zero sale proceeds, and trigger a capital loss (or ABIL allowable business investment loss depending on the facts – please see below).

TAX TIP      If you, or somebody you know, receives monthly UCCB Universal Child Care Benefit cheques in respect of children, be sure that you now receive a larger amount because the government recently increased the UCCB amount by $60 per child effective July, 2015 with an extra $420 per child catch-up payment for the first 6 months of 2015.  UCCB payments are generally issued on the 20th day of each month.

Regarding shares you hold, the corporation must be bankrupt, being wound up, or insolvent and no longer doing business.  The shares of an insolvent corporation must also have no value and it must be reasonable to conclude that the corporation will be wound up or dissolved.  However, if the shares or debt recover some value in future, you will have a capital gain to the extent you receive any proceeds.

You must obtain documentation to support the presumption of insolvency in case CRA Canada Revenue Agency challenges your filing position.  In addition, if liabilities exceed assets on a fair market basis, the corporation is usually considered insolvent.

You must make the election in your tax return for the year that the loan is uncollectible or the company is insolvent in order to have the deemed disposition rules apply.  There is no prescribed form for making this election and so you usually make it by appending a letter to your return.  If you file your election late, you may be able to apply for an extension of time to file it.  CRA may also challenge your loss if it is claimed in a subsequent year after the loan has become uncollectible or the company becomes insolvent.

TAX TIP         There are some Tax Myths floating around, so you really need to know the Tax Facts.  For example, did you know that being audited once by CRA does not mean that you will be off the hook for future years?  Also, did you know that sending CRA a note to explain your business’ performance will not prevent an audit?  In fact, if you were selected for audit and an upwards reassessment was issued by CRA, this may actually increase the likelihood of a near future audit.

As long as you have potential tax losses to claim, you may have significant tax refunds owing to you.   Since the income tax rules are complicated, there are potential problems and pitfalls in this area.  The best way to ensure your success is to seek professional advice.

To arrange your personal and confidential FinancialCHECKUP™, call now 905-709-HELP or click here.