When a client dies, any property he owned is automatically deemed sold at fair market value, which could lead to capital gains or losses. But what if that property includes stock certificates from companies that no longer exist?
It’s usually up to the personal representative (an estate trustee in Ontario, a liquidator in Quebec) to deal with these worthless securities. If the shares are valued at $0, upon death they’re deemed to have been disposed for $0. Usually that gets the estate a capital loss.
That loss can offset any income in the year of death, or 50% of any capital gains in the previous year’s return—and sometimes both. Suddenly, the worthless shares have become valuable, especially if the adjusted cost base was high.
Assume your client bought $50,000 worth of stock, but the company went out of business five years ago. The stock certificates are found in his safety deposit box, and it turns out they’re worth $0. The capital loss is $50,000, of which $25,000 can be applied to offset income or gain.
Say his income the year he died was $15,000, and capital gains income the previous year was $10,000. The capital loss of $25,000 offsets the $15,000 income and $5,000 of last year’s capital gains. (The remaining $5,000 loss can’t be used.)
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