Disposing of Shares with No Value

There are times when shareholder disposes of shares with no apparent proceeds. What are the tax consequences?   Following are three examples you will want to know more about as you do some year end tax planning with investors.

Excerpted from the CE Savvy Summits - Audit Defence Course

The company goes bankrupt:  When the company that sold the shares goes bankrupt, the shares become worthless. This is equivalent to a disposition with zero proceeds. The result is a capital loss. If the company was a qualified small business corporation, that loss may be a Business Investment Loss.

The shares are exchanged: When the issuing company merges with another, the investor's shares may be exchanged for shares in a different corporation. This does not result in a capital gain or loss, but the ACB of the old shares becomes the ACB of the new shares.

Shares are transferred to a registered account. If the taxpayer transfers their shares to their RRSP, TFSA, or FHSA, they are deemed to have disposed of them at their fair market value. Generally, there are no outlays associated with such a transfer. If the shares are transferred to the investor's RRSP, they will receive an RRSP contribution receipt for the fair market value of the shares.

Likewise, the fair market value of shares transferred from a non-registered account to a FHSA will be deductible as a FHSA contribution.

Shares that have decreased in value should never be transferred into a registered account because a special rule deems such a loss to be a "superficial loss," and that loss cannot be deducted. In such a situation, it is best to sell the shares at market value  and take the capital loss, then contribute the cash proceeds to the registered account. It is important that the shares not be re-purchased inside the registered within 30 or the sale, or the sale will be deemed to result in a "superficial loss" which cannot be claimed.