Can Canadian investors save tax when a stock company goes bankrupt?

If you transfer the investment to a register account, it proves that stating this assumed behavior will not trigger a tax-deductible loss due to the superficial loss rules.

If the stock goes down, Jake, you’d want to lose money, even though you might not be able to sell the stock. According to the Canada Revenue Agency (CRA):

In the case of a share in a company… the taxpayer must own the share at the end of the tax year and the corporation must:

1. they have no income for the tax year;

1. it was a corporation referred to in section 6 of the Liquidation and Reorganization Act that was insolvent within the meaning of that Act and a winding-up order under that Act was made in the tax year; or

1. be insolvent at the end of the tax year, and, at that time, the corporation, or its controlling entity, must also be in business. Additionally, at that time, the share must have a fair market value of nil and it must be reasonable to expect that the company will be liquidated or will be liquidated and will not start doing business.

So, a poor company should qualify, Jake. And to claim the loss, you need to make an election in writing by submitting a letter with your tax return for the year you claim to make the election under Section 50(1) of the Income Tax Act.

Some brokerages will buy the stock from you for a small amount. They may also charge an administration fee, but this can also allow you to claim the loss and get an official tax slip (T5008) showing the situation. It also means you don’t have to look at useless security on your account for years to come.

You can claim a capital loss to reduce capital gains realized in the same year. If your losses exceed your gains in a tax year, you can also carry back losses for up to three years to offset past capital gains. And capital losses can be carried forward indefinitely for future use against capital gains.

Allowable business losses (ABILs)

If you are a shareholder of a failed private company, you may be able to claim an allowable business loss (ABIL) instead of a financial loss. The company must be a small business corporation (SBC).

According to the CRA:

This is a Canadian-controlled private company in which all or most (90% or more) of the fair market value of its assets:

• they are used primarily in active business conducted primarily in Canada by the corporation or a related corporation.
• they are shares or debts of affiliated companies that were small business corporations
• they are a combination of these two types of goods

If subsection 50(1) of the Income Tax Act applies—in fact, if the company is insolvent or has no debts at the end of the year—you can claim an ABIL from a small business company, Jake.