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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.

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23 Comments

  1. saveING.ca This is why I signed up with ING Direct on December 1, 2009 at 10:50 am

    wow thanks for that, dunno if I can go back to the Laidlaw bankruptcy…

  2. noob on December 1, 2009 at 11:38 am

    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?

  3. Jerry Hung on December 1, 2009 at 9:58 pm

    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

  4. Tax Guy on December 1, 2009 at 10:56 pm

    @ 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.

  5. Kinny on December 2, 2009 at 9:56 pm

    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!

  6. Tax Guy on December 2, 2009 at 10:40 pm

    @ 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.

  7. rob22 on December 3, 2009 at 6:02 pm

    when you claim capital loss …for the dlisted company..attach a note saying to CRA you want to claim under section 50..

  8. ghostryder on December 4, 2009 at 3:11 am

    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).

  9. boomtrader on December 6, 2009 at 10:31 am

    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

  10. CGA on March 16, 2010 at 11:51 am

    I just spoke to CRA regardng nortel who confired what tax guy said using section 50(1)

  11. JJ on April 12, 2010 at 2:20 pm

    If you received the Nortel shares way back when BCE split them off how do you figure out the total loss? Back then Nortel was flying high (I know should have sold them……). Is there somewhere where this type of information is available?

  12. patrick on April 14, 2010 at 10:29 pm

    boomtrader: why would a person need to do that? I don’t see any reason for that…according to your broker, the defunct stocks are still in your acct…so why would you need to repurchase them?

  13. Neil on April 16, 2010 at 6:40 pm

    Hi great thread…a related question on Nortel stock…As all of you, I too unfortunately still own Nortel stocks….

    So in order to show it as a capital loss in my tax return…do I actually need to sell the stock, and re-buy it ? Or its an assumption which leads to the point that whatever u spent on purchasing the stock is ur actual loss ?

    Also, if I do need to actually sell the stocks, then how do I do that ?

    And if I dont need to sell the stocks, but put the details on Schedule 3, then do I need a tax receipt or something of that sort as proof, or just a share certificate is enough ?

    If I am filing taxes online, then do I need to send some documents to CRA regarding this – OR its pretty sure that my return is going to be audited and that I will have to provide the documents then (dont care if its audited..just for info)..

    Finally, as per conflicting posts above, that Nortel might / might not be counted under section 50…today, is it considered under that section or not…ie. can i claim a loss or not ?

    Thanks a lot.

  14. patrick on April 16, 2010 at 8:54 pm

    Do warrants or rights that have expired worthless qualify for this?

  15. patrick on April 16, 2010 at 8:57 pm

    Neil: i don’t think you’d be able to sell your Nortel stock…on what exchange does it trade on? I don’t believe it is on any exchange.

  16. Martin on April 26, 2010 at 10:56 am

    Hi, Can anyone tell me if Oilexco, T.OIL, meets the requirements for making a Capital Loss claim on my 2009 Tax Return (through the deemed sale of my shares)? I am using Quicktax to file, so if I can claim the loss, how would I go about it? Thanks. A Naive Almost Septuagenarian

  17. Jeff on May 14, 2010 at 10:56 pm

    How long do you have to claim the stock that was delisted on your return. For example I have a stock that was delisted 3-years ago which I never followed this procedure for (thereby never claiming capital loss) – can I still fill in Schedule 3 – 3years later?

    Jeff

  18. BensonAnalyst on February 13, 2012 at 12:12 am

    My stock Campbell Resources TSX : CCH was delisted a couple of years back..but is trading on OTC BB under the symbol CBLRF and still shows up in my account as CBLRF..its worthless and hard to get rid off as there are no bids or asks.

    So how do I claim a capital loss for it as it still shows up on the OTC BB which is not really a stock exchange but an Over The Counter Bulletin..and still shows up in my account as CBLRL although the company is essentially bankrupt and insolvent.

  19. Christina on February 13, 2012 at 2:22 pm

    Would it be possible to hold the Notel stocks and sell it in 2 or 3 yesrs?

    I am asking this questions as I did not have any capital gains last year, so I prefer to sell it later when I do have gains to offset on my tax claims.

    Does it make sense? I live in Canada.

    Christina

  20. Michael on February 13, 2012 at 6:38 pm

    @Christina, if you sold now you can carry forward your capital loss indefinitely to offset future gains so it is not required to hold for 2 or 3 years for that reason.

    Note that I sold my nearly worthless position in NT last year. TDW did not charge the full commission and only enough the cancel the shares for about $0.30. That was really the cleanest and cheapest solution.

  21. Mayra on April 28, 2014 at 10:07 am

    100% of all NOVA CHEMICALS shares were bought in 2009 by International Petroleum Investment Company.The shares were bought out at $6 each; the company is no longer trading publicly.
    I had 210 shares in JTWROS with my mother. She passed away in Jan. 2013. I cashed the certificate in August (2013) and banked the $1,260.
    So how do I report this on my income tax?

  22. SANDRA O on February 22, 2016 at 2:43 am

    Hello,
    I am inquiring on behalf of my mum. thank you for the information provided. I would like to know, how do I go about getting hold of documentation showing ownership of Nortel stock and the subsequent losses which followed? I believe these documents have bee misplaced.

    Thank you in advance for your direction.

    Sincerely,
    Sandra O.

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