Worthless shares election (s. 50(1))

An owner meets this election when a corporation they hold shares in has failed and the shares are worth nothing. Where the election is made, the shares are deemed disposed of at the end of that year without an actual sale. It is made in the owner’s own return, not by the corporation.

What s.50(1) requires

• The shares are owned at the end of the year, other than a share received as consideration for the disposition of personal-use property.
• One of three situations applies: the corporation became bankrupt in the year, a winding-up order under the Winding-up and Restructuring Act was made in the year against an insolvent corporation referred to in section 6 of that Act, or at year end the corporation is insolvent, neither it nor a corporation it controls carries on business, the share’s fair market value is nil, and it is reasonable to expect the corporation will be dissolved or wound up and will not commence to carry on business.
• The taxpayer elects in the return of income for the year.

What to check

Under s.50(1.1), where the deemed sale arose under s.50(1)(b)(iii), and the owner or a person not dealing at arm’s length with the owner holds the share at the earliest time in the 24-month period after the deemed sale that the corporation or one it controls carries on business, that holder is deemed to dispose of the share at that time for its adjusted cost base immediately before the first deemed sale. Read adjusted cost base, and the CRA’s capital gains guide, which describes the election for debts and shares of a small business corporation in its section on business investment losses. For a seller weighing a failing company, see selling a failing business before bankruptcy.