If you transfer investments to a registered account, it’s worth noting that this deemed disposal will not trigger a tax-deductible capital loss due to the apparent loss rules.

Jack, when a stock goes bankrupt, you can claim a capital loss even though you may not be able to sell the stock. According to the Canada Revenue Agency (CRA):

In the case of company shares…the taxpayer must own the shares at the end of the tax year and the company must:

1. becomes bankrupt during the year of assessment;

1. is a company mentioned in section 6 of the Liquidation and Reorganization Act that is insolvent within the meaning of that Act and for which a winding up order was made under that Act during the tax year; or

1. becomes insolvent at the end of the tax year, at which time either the company or a company it controls must cease trading. Furthermore, at that time, the fair market value of the shares must be zero and there must be a reasonable expectation that the company will be dissolved or wound up and will not commence business.

So, bankrupt companies should qualify, Jack. To claim a loss, you need to submit an election in writing and make an election under subsection 50(1) of the Income Tax Act in the year of claim and attach a letter to your tax return.

Some brokerage firms will buy shares from you for a nominal amount. They may charge an administration fee, but this also allows you to claim your losses and receive an official tax bill (T5008) showing the disposition. It also means you won’t have to worry about worthless security in your account for years to come.

You can claim a capital loss to reduce capital gains incurred in the same year. If your losses exceed your gains in a tax year, you can also carry your losses back up to three years to offset previous capital gains. Net capital losses can also be carried forward indefinitely to be used against capital gains in the future.

Allowable Business Investment Loss (ABIL)

If you own stock in a bankrupt private company, you may be able to claim allowable business investment losses (ABIL) instead of capital losses. The company must be a Small Business Corporation (SBC).

According to the Canada Revenue Agency:

This is a Canadian-controlled private company with all or a substantial portion (90% or more) of the fair market value of its assets:

• Primarily for active business in Canada conducted primarily by the company or associated companies
• Are shares or debt of an affiliate of a small business
• is a combination of these two types of assets

You can apply for ABIL from a small business if section 50(1) of the Income Tax Act applies (basically, if the company becomes bankrupt or insolvent at the end of the year), Jake.