The tax treatment of a particular item or issue does not necessarily follow the accounting treatment.
For example, if an investment in shares or debt of a company which becomes insolvent is written off for accounting purposes, this does not create a capital loss or business investment loss for tax purposes. The accounting treatment is disregarded for tax purposes; the loss is unrealized unless there has been an actual sale or disposition of the shares or loan. In many cases there will never be an actual disposition after a company becomes insolvent.
However, subsection 50(1) of the Income Tax Act provides for a deemed disposition of an investment in a company which becomes insolvent, but only if an election to use the provision is made. If an election is not made, a loss will be denied by the CRA. When subsection 50(1) is used, the taxpayer is deemed to sell the investment for nil proceeds and reacquire it for nil cost. Any amount subsequently recovered or realized from an actual disposition of the investment must be included as proceeds of disposition for tax purposes.
There is no prescribed form for the 50(1) election, so it can be submitted in any format. The election must be attached to the tax return for the year to which the election relates. Income Tax Regulation 600 permits a late filed subsection 50(1) election, but there is a penalty of $100 a month to a maximum of $8,000.
This election is often overlooked in personal and corporate tax returns and the penalty may be onerous. There are many conditions that need to be met for the subsection 50(1) election to apply, so a tax advisor should be consulted.
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