I received a reader question about Nortel last week that may be of interest to readers of Canadian Tax Resource.
I did not own any of the Original Shares of Nortel Network Corporation that I had previously acquired on my non RRSP capital account, when (Based on the Nortel 2 Class Action Litigation Settlement), I received a cheque for $235.56 and 21 Nortel shares on May 12, 2008.
I made arrangements with my broker on May 22, 2008 to have these shares deposited into my brokerage account. On May 27, 2008 these 21 shares were recorded on my account at $8.11 per unit for a total amount of $170.31.
Since I had previously disposed of all my original Nortel shares, I understand that the $235.56 and the Fair Market Value of the 21 shares would be my capital gains and 50% of this capital gain would be my taxable capital gain for 2008.
My questions are:
- Would the FMV of these shares to be applied for my 2008 tax Year be $8.11/unit amounting to a total of $170.31?
- If not, please advise if the FMV should be based on the date of receipt on May12, 2008 and if so, what would this FMV be on the date of receipt?
- As I am still holding these 21 shares in my brokerage account would the $8.11/unit or the FMV based on the date of receipt of May 12, 2008 be applied as the adjusted cost base for the existing 21 shares in my account?
- Since these 21 shares are currently only valued at 8 cents per share, what would be the best approach to eliminate all these Nortel shares from my brokerage account?
Analysis Of The Case
Based on the facts provided, you originally held the shares outside of a RRSP or RRIF and no longer held the shares when you received the settlement. You received a cheque for $235.56 and 21 shares of Nortel and your gains and losses are taxed as capital gains and losses.
The relevant date for the purposes of determining your adjusted cost base and capital gain is May 12, 2008.
Treatment of The Receipts
The $235.56 was a taxable capital gain in 2008 and 1/2 of this amount should have been included on your 2008 tax return.
The fair market value of the shares is also a capital gain on the date you received them and 1/2 of that amount is taxable.
The closing price of Nortel on May 12, 2008 according to Yahoo Finance (NT.TO) was $8.20. Based on this amount, the capital gain on your 21 shares would be $86.10.
Effect of 2009 Bankruptcy
Since you still hold the shares, you can claim a deemed disposition in 2009. The fair market value of this disposition is nil and you can claim a taxable capital loss of $86.10. If you have any net losses after first claiming gains in 2009, you can carry the excess back three years.