Under what situation, can a loss be claimed?

According to Section 50(1) of the Income Tax Act, there are three scenarios in which a loss can be claimed: i. the company went bankrupt during the year ii. the company is insolvent and subject to a “winding-up order” iii. 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 the above three situations applies, the investor can deem to have disposed of the stock at the end of the year for proceeds equal to nil and to have re-acquired it immediately after the end of the year at a cost equal to nil. As a result, the taxpayer will be able to realize the capital loss on the property.

How is the loss applied?

The capital loss is applied first against capital gains in the current year. If there are any excess capital losses, they can be carried back to any of the three preceding taxation years, or forward indefinitely and applied against capital gains in those years.

What is the significant of reacquiring the shares for nil?

Since an investor who makes a subsection 50(1) election is deemed to have disposed of and reacquired the property at an ACB of nil, if at some point in the future the shares are no longer worthless and happen to increase in value, the investor will realize a capital gain upon disposition. It is to be noted, however, that where the election is made in respect of an insolvent corporation and the corporation begins to carry on business again within 2 years, the capital loss previously reported will be eliminated.

What if a cease trading order (CTO) has been issued against the company?

It should be noted that the issue of a cease trading order (CTO) does not automatically suggest that the above conditions for ss. 50(1) to apply are satisfied. A CTO is issued by a provincial or territorial securities commission against a company for failing to meet disclosure requirements and prohibits trading in that company’s shares; nevertheless, the company may continue to carry on business.

How do you claim a loss?

There is no prescribed form for making a Section 50(1) election. To claim a capital loss on a bad debt, you have to file an election with your income tax and benefit return. To make this election, write and sign a letter stating that you want subsection 50(1) of the Income Tax Act to apply to the bad debt. Attach this letter to your return. For returns that are electronically filed, all elections and supporting documentation must be submitted in writing.

Can the loss be claimed as a business investment loss?

The loss under subsection 50(1) from the shares of a “small business corporation” may result in a business investment loss, 50% of which is referred to as the “allowable business investment loss”, or ABIL. Unlike capital losses, an ABIL is deductible against all sources of income, not just capital gains. While an ABIL may be carried back up to three years, it can only be carried forward 10 years and deducted in calculating the taxable income of such other years. An ABIL that is not deducted as a non-capital loss by the end of the carry-forward period becomes a net capital loss at the end of the tenth year. This treatment allows the loss to be carried forward indefinitely to be deducted against taxable capital gains beginning in the eleventh year.

How is a “small business corporation” defined in the Income tax Act?

A “small business corporation” as defined in the ITA refers specifically to a Canadian-controlled private corporation of which substantially all (i.e. 90% or more) of the fair market value of the assets are used in an active business carried on primarily in Canada.

Does making an election under subsection 50(1) require any supporting documentation?

In many of the published cases, the CRA and/or the Courts denied a taxpayer’s election because there was insufficient documentation to support the circumstances triggering the loss. It is therefore good practice for the taxpayer to ensure that sufficient and relevant information is properly documented. Ideally, this documentation should commence at onset of the financial problems. And, of course, this documentation should be retained. In applicable cases, documentation to support the presumption of insolvency also should be retained to support the filing position.

Subsection 50(1) Election: Claim Losses on Bad Debts & Worthless Shares

Subsection 50(1) Election: Tax Relief for Bad Debts, Defunct Shares, and Bankrupt Corporations

When investors hold shares or debt in a company that becomes bankrupt, insolvent, or simply worthless, it can be difficult or oftentimes impossible to dispose of those securities. Defunct shares often cannot be traded once delisted, and even if they are sold, they typically generate only a nominal capital loss.

However, Canadian tax law offers a valuable solution: the Subsection 50(1) election under the Income Tax Act (ITA). This election allows taxpayers to crystallize a capital loss or allowable business investment loss (ABIL) even when they cannot sell the shares or debt.

What Does Subsection 50(1) Do?

Subsection 50(1) allows eligible taxpayers to claim a loss by deeming their worthless shares or bad debts to have been:

Disposed of for $0 (nil) at year-end, and
Immediately reacquired at an adjusted cost base (ACB) of $0

This creates a realized loss, even if no actual sale occurred.

Because many investors are unaware of this election, they often miss out on meaningful tax relief.

When Can You Use Subsection 50(1)?

Taxpayers may elect to claim a capital loss in two specific situations:

1) Subsection 50(1)(a): Bad Debts

A taxpayer may claim a capital loss if all three conditions are met:

Condition 1 — The debt is a bad debt

The debt must be uncollectible at year-end. Courts consider factors such as:

History and aging of the debt
Debtor’s financial condition
General economic conditions
Reasonable, honest determination by the lender

CRA guidance states a debt is considered bad if:

All legal means of collection have been exhausted, or
The debtor is insolvent and unable to pay

Condition 2 — The debt is owed at year-end

The debt must exist and still be owed by the debtor at the end of the taxation year when the election is made.

Condition 3 — The loan was made for income-earning purposes.

Even interest-free loans may qualify if made to a corporation where the lender expects potential income in the future.

2) Subsection 50(1)(b): Worthless or Defunct Shares

A taxpayer may elect to claim a capital loss on shares when any one of these applies:

Situation A — The corporation became bankrupt during the year.

Situation B — A winding-up order was made under the Winding-Up and Restructuring Act.

Situation C — All four conditions below are met at year-end:

The corporation is insolvent
Corporation (and any controlled corporation) has ceased business activities
Fair market value of the shares is nil; and
It is reasonable to expect the corporation will be dissolved, wound up, and not resume operations

This provision is helpful because the conditions may be met for multiple years, allowing taxpayers to file the election even if they missed the original timing.

How to File a Subsection 50(1) Election (Format + Requirements)

Unlike other elections, there is no official CRA form. CRA requires a signed letter attached to the tax return. The letter must include:

A statement that the taxpayer elects under Subsection 50(1) ITA
Name, address, and SIN
Description of the shares or debt
Adjusted cost base (ACB)
Date of bankruptcy or insolvency (if applicable)

For electronically filed returns

Supporting documents must still be submitted in writing with a cover letter confirming they support an e-filed return.

For small business corporations (SBCs)

The election must include:

Corporation name
Number and class of shares
ACB
Bankruptcy/winding-up details

Late-Filed Elections

CRA may accept late-filed Subsection 50(1) elections up to 10 calendar years after the original due date.

Penalty: The lesser of

$8,000, or
$100 per month from the original due date to the filing date

Taxpayers may request a waiver of penalties if:

Extraordinary circumstances prevented timely filing
A CRA action caused the delay
Financial hardship exists

Waivers are granted solely at CRA discretion.

Allowable Business Investment Loss (ABIL)

If the loss relates to:

Shares of a small business corporation (SBC), or
Debt owed by a Canadian-controlled private corporation (CCPC)

Then the loss may be considered a business investment loss, 50% of which becomes an allowable business investment loss (ABIL).

Why ABILs Are Valuable

Deductible against all income sources, not only capital gains
Carry back 3 years
Carry forward 10 years
After 10 years, unused ABIL converts into a net capital loss and can be carried forward indefinitely against capital gains

Important Terms and Notes

Small Business Corporation (SBC)

Under the Income Tax Act (ITA), a small business corporation (SBC) is defined as a Canadian-controlled private corporation (CCPC) in which 90% or more of the fair market value of its assets are used in an active business carried on primarily in Canada.
This definition is essential for determining whether a capital loss may qualify as a business investment loss, potentially resulting in an Allowable Business Investment Loss (ABIL).

Superficial Loss Rules Do Not Apply

Ordinarily, when an investor disposes of capital property and reacquires it within a short window, the superficial loss rules can deny the loss. However, because the Subsection 50(1) election deems a disposition and immediate reacquisition, the superficial loss rules do not apply. This is an important advantage, as it ensures the taxpayer can claim the capital loss despite still owning the shares.

Advantage of Using Subsection 50(1)

One of the most attractive benefits of filing a 50(1) election is that the taxpayer can write off the investment while still retaining ownership. If the corporation later recovers financially, the shares may regain value. Any amounts recovered in the future are treated as capital gains, ensuring proper tax treatment without jeopardizing the initial loss claim.

Cease Trading Order (CTO)

A cease trading order does not automatically mean the conditions for Subsection 50(1) are met.
A CTO simply prevents a company’s shares from being traded because the company has failed to meet certain securities disclosure requirements. Importantly, the company may still be operating, meaning the shares may not meet the nil-value or insolvency tests required for a valid 50(1) election. Proper factual review is necessary before filing the election.

Application of Capital Losses

Capital losses can generally be applied only against capital gains.
The order of utilization is:

Current-year capital gains
Carry back to any of the three preceding tax years to reduce prior capital gains
Carry forward indefinitely to offset capital gains in future years

This emphasizes why crystallizing a loss under 50(1) is valuable for long-term tax planning.

Supporting Documentation is Critical

In many cases, the CRA or the courts have denied Subsection 50(1) elections due to insufficient documentation.
Taxpayers should maintain detailed records, including:

Financial statements
Correspondence with the debtor
Evidence of insolvency
Collection attempts
Legal notices
Valuation information

Documentation should begin as soon as financial difficulties arise and be retained indefinitely.

Allowable Business Investment Loss (ABIL) Audits

ABIL claims are frequently subject to CRA audit, due to the significant tax advantages they provide. The CRA may request:

Detailed questionnaires
Additional documentation
Evidence of SBC status
Proof that the debt or shares qualify

Taxpayers should be prepared to support their claim comprehensively.

Meaning of “End of the Tax Year” Under Subsection 50(1)

For Subsection 50(1), the end of the tax year refers to the taxpayer’s own tax year, not the corporation’s. This distinction matters because the deemed disposition and reacquisition occur in the taxpayer’s personal tax year, determining when the loss can be recognized.

Revoking a Subsection 50(1) Election

The CRA may, under subsection 220(3.2) and Regulation 600(b), accept a request to revoke a Subsection 50(1) election. However, revocation is permitted only in limited circumstances and is often subject to penalties under subsection 220(3.5).

When CRA May Permit Revocation

Revocation may be allowed when:

The taxpayer reasonably believed the debt was uncollectible
A valid election was filed
But the resulting loss was deemed nil under subparagraph 40(2)(g)(ii) (e.g., certain non-arm’s-length debts)

In such cases, revocation prevents a deemed $0 disposition and allows future collections to reduce the ACB rather than create a capital gain.

When CRA Will Refuse Revocation

CRA generally refuses revocations if they amount to retroactive tax planning, such as:

Attempting to undo an election to avoid the application of Subsection 50(1.1)
Attempting to take advantage of hindsight
Changing a tax outcome after results are known

Guidance is available in Information Circular IC 07-1, which outlines CRA’s criteria for accepting or rejecting revocation requests.

Contact Kalfa Law Firm for Guidance on Subsection 50(1) Elections

Navigating Subsection 50(1) elections, ABIL claims, and capital loss treatments can be complex and costly if handled incorrectly. Whether you’re dealing with a bad debt, defunct shares, or a bankrupt corporation, our experienced tax and corporate lawyers can help you determine eligibility, prepare the required documentation, and file your election properly.

If you suspect your investment has become worthless or you’re unsure how to proceed, speak with a Kalfa Law Firm professional today.

Book a consultation and get legal guidance before filing your next tax return.

FAQs:

What is a Subsection 50(1) election?

A Subsection 50(1) election allows taxpayers to claim a capital loss or ABIL on bad debts or worthless shares when they cannot sell the investment.

When can I use the 50(1) election for bad debts?

You can claim a loss on a bad debt when the debt is uncollectible, still owed at year-end, and originally made for income-earning purposes.

How do I claim a loss on shares of a bankrupt corporation?

You can file a 50(1)(b) election when the corporation is bankrupt, under a winding-up order, or insolvent with shares that have nil value.

Is there a CRA form for Subsection 50(1)?

No. You must file a signed letter with your tax return stating your intention to elect under Subsection 50(1) ITA.

Can I file a Subsection 50(1) election late?

Yes. CRA may accept late filings up to 10 years later, but penalties may apply unless waived by CRA.

What is an ABIL?

An ABIL (Allowable Business Investment Loss) is a special loss that can be deducted against all income sources, not just capital gains.

The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.

Speak with a business & tax lawyer today.