Bad debts and insolvent companies

Shares of a Bankrupt/Insolvent Corporation: 

If shares in a corporation that is bankrupt or will be wound up are worthless (FMV = 0), you can elect under s. 50 to claim a capital loss.

If the debt or shares are in a Small Business Corporation (SBC)

the loss may qualify as an Allowable Business Investment Loss (ABIL).

how the elections works for insolvent company

A taxpayer buys shares in ABC Ltd. for $100,000. ABC Ltd. goes bankrupt and its shares become worthless (FMV = $0).

• capital loss equal = investment
  ACB = 0

If the company unexpectedly recovers within 24 months

• The taxpayer is deemed to have sold the shares for $100,000.

• Capital gain = $100,000 - $0 ACB = $100,000.

• The ACB of the shares is restored to $100,000.

bad debt write-off

A taxpayer lends $50,000 to a business. The business goes bankrupt and cannot repay the loan.

• Section 50 election:

  Capital loss = $50,000 (because FMV = $0).

if the business pays back 10,000

capital gain = 10,000