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investor clinic

A reader asks how they can sell the shares of a company (such as Sears Canada) that has gone out of business to claim a capital loss for tax purposes.Nathan Denette/The Canadian Press

If I own shares of a company (such as Sears Canada) that has gone out of business and has been delisted from the stock exchange, how can I sell the shares to claim a capital loss for tax purposes?

Selling the shares may not be necessary. According to the Income Tax Act, you can claim a capital loss if one of the following conditions is met:

  • The company went bankrupt during the year in which you file;
  • The company is insolvent and subject to a “winding-up order”;
  • 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.”

In such cases, you 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," the Income Tax Act states. Because you would still own the shares, you would be responsible for any capital-gains tax in the unlikely event the shares subsequently increased in value and you sold them.

According to TaxTips.ca, you should include a signed letter in support of your tax return – even if you file electronically. "The letter should state that you want subsection 50(1) of the Income Tax Act to apply to the particular transaction," TaxTips.ca says.

Another option is to ask your broker to help you dispose of the shares. Your broker may ask you to fill out a "deed of gift" form that transfers the shares to the broker at a value of zero. In this case, you could claim the capital loss, but would no longer own the shares.

When you have a capital loss, you must first apply it against capital gains in the same year. If you still have capital losses left over, you can carry them back up to three years or forward indefinitely to offset taxable capital gains in those years.

Last year, I contributed $52,000 to a tax-free savings account (the maximum allowed cumulatively for the years 2009-17). My investments have since dropped by $3,500 and my TFSA balance is now $48,500. If I make a withdrawal for the entire balance can I redeposit $52,000?

No. When you make a withdrawal from your TFSA, the amount withdrawn is added to your contribution room the following year. So, if you were to withdraw $48,500 now, this amount would be added to your contribution room on Jan. 1, 2019. The fact your TFSA was originally worth $52,000 is irrelevant. Also keep in mind that, as of Jan. 1, you received an additional $5,500 of contribution room.

If a stock splits, what happens to the dividend?

When a stock splits two-for-one, you end up with twice as many shares, but each share is worth half as much – all else being equal. So you don't gain, or lose, any value from the split. Similarly, the dividend paid for each share is halved but, because you now have twice as many shares, your total dividend income is the same as before the split.

Why has the price of A&W Revenue Royalties Income Fund (AW.UN) fallen so much?

I own AW.UN personally and in my model Yield Hog Dividend Growth Portfolio, so I'm keenly aware the units have tumbled. They're down about 19 per cent in the past year and nearly 5 per cent since I added them to my model portfolio at the end of September. Other restaurant royalty stocks – notably Pizza Pizza Royalty Corp. (PZA), which I also own – have also struggled. A few factors could be at play. Given the harsh winter weather and the proliferation of discounts and promotions in the fast-food industry, investors might be nervous about A&W's fourth-quarter results, which will likely be released in February. The recent hike in Ontario's minimum wage might also be affecting sentiment toward fast-food stocks in general, but it's worth pointing out A&W's distribution – which the company raised in October – is tied to top-line sales, not to the restaurants' bottom line. Finally, the recent spike in bond yields probably hasn't helped A&W's units, which are sensitive to interest rates. All of that said, A&W is a growing company, the units now yield an attractive 5.2 per cent and the burgers are delicious (the Teen Burger is my personal fave). So I intend to hold through this period of weakness.