I realized a large capital gain in my investment account this year. I also have an old stock that no longer trades on an exchange but is still shown in my trading account. Even though I never actually sold my shares of the company, Medipattern Corp., can I use the loss on the shares to offset my capital gain?
Yes. According to the Income Tax Act, there are three scenarios in which a loss can be claimed even if the shares were not sold.
- the company went bankrupt during the year
- the company is insolvent and subject to a “winding-up order”
- the company is insolvent; it no longer carries on business; the fair market value of the shares is nil; and “it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on business.”
If one of these three situations applies, an investor can elect to claim a “deemed disposition” of the stock “for proceeds equal to nil and to have reacquired it immediately after the end of the year at a cost equal to nil,” the Income Tax Act states.
The part about reacquiring the shares for nil is there for a reason: In the unlikely event that the shares increase in value at a later date, the investor could potentially realize a capital gain and have to pay tax.
But don’t expect a phoenix-like revival in Medipattern’s case.
Investor Clinic: Read this before you transfer a losing stock to your TFSA
According to a press release dated April 25, 2013, the medical technology company “failed to reach a negotiated settlement with its secured creditors,” who filed an application to appoint a receiver under the Bankruptcy and Insolvency Act. The TSX Venture Exchange then suspended the shares from trading and later moved them to NEX, a trading forum for companies that have fallen below TSX Venture’s listing standards. The shares were formally delisted on May 13, 2015, for failure to pay their quarterly NEX listing maintenance fee.
When you claim the loss on your tax return, it is generally recommended that you attach a signed letter (which you’ll need to mail separately if you are filing electronically) to the Canada Revenue Agency stating that the company is no longer operating, its shares have been delisted and you wish to make an election under Section 50(1) of the Income Tax Act. Include any supporting documentation you have.
Capital losses must first be applied against capital gains in the current year. Any remaining capital losses can be carried back up to three years, or forward indefinitely, to offset gains in other years.
Another method of crystallizing a capital loss is to have your financial institution remove the worthless securities from your account. RBC Wealth Management explains the procedure in an article titled “Claiming losses on worthless securities.”
“In order to be able to claim the loss for tax purposes, the removal of a worthless security from your account must be permanent,” RBC says.
“In the very rare event that the worthless security is ever valued in the market … you will not be able to reacquire the security or receive the distribution from the financial institution that acquired the worthless security because the original disposition was permanent. Therefore, if there is any possibility that the security will ever recover in the future, you may want to choose an alternative method to claim the tax loss.”
But I wouldn’t worry about that in your case.
Investor Clinic: Eight years on, my dividend portfolio keeps churning out cash
I purchased the stocks in your model Yield Hog Dividend Growth Portfolio last fall, and I am up about 20 per cent since then. I now have another bit of cash that had been in an interest-bearing account for the past nine months. Given where the stocks are today, would you take $100,000 and buy more Yield Hog?
This is a good time to remind people that the model dividend portfolio isn’t meant as a template to be copied exactly. Rather, it is intended to provide an illustration of how dividend investing works and to serve as a source of investing ideas.
Because the model dividend portfolio is heavily focused on Canadian stocks – with concentrations in banks, utilities, pipelines and real estate investment trusts – it doesn’t provide adequate diversification on its own. That’s why I encourage people to supplement their dividend stocks with Canadian and U.S. exchange-traded funds that track the S&P/TSX Composite Index and S&P 500, respectively.
As for whether now is a good time to invest in stocks generally, I don’t claim to have any insight regarding where markets are heading. If you feel that your portfolio would benefit from additional exposure to equities – given your risk tolerance and current asset allocation – you could consider adding an ETF or two or increasing your position in one or more of your existing stocks.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.