Stock Losses: Understanding Their Tax Treatment

As tax filing season approaches, the issue of how to handle losses from stock investments comes back into focus. In this article, we review the general principles governing the reporting of potential losses from these investments, to help you better anticipate their impact and approach your tax return with greater peace of mind.

The information below is general in nature and provided for informational purposes only; it does not constitute tax or legal advice, a personalized recommendation, or an incentive to report a loss. It is the responsibility of each investor to consult a professional to obtain advice tailored to their specific situation and investments before making any decisions or filing tax returns. Raizers shall not be held liable for the use of this information.

I. For individuals who have invested in stocks

Unrealized capital losses—that is, those that have not yet been realized—cannot be deducted or offset.

Permanently recognized capital losses (permanent capital losses) may be offset against income of the same nature, that is, capital gains on securities. It is up to each investor to determine whether a permanent capital loss can be recognized in their specific circumstances.

What amounts could be charged in the event of a permanent loss of equity?

Only losses incurred in the following situations are covered:

• Sale of shares;
• Involuntary cancellation of shares in the context of receivership or liquidation proceedings, or in the context of the company’s early dissolution due to losses equal to or exceeding its equity.

Losses incurred in a PEA cannot be deducted for tax purposes.

The deductible portion is limited to the purchase price of the shares, reduced, if applicable, by any tax credits applied to them (e.g., the IR-PME tax credit, also known as the Madelin tax credit).

If you received an IR-PME tax reduction, also known as the “Madelin Reduction”

The Madelin deduction is not affected in the event of an involuntary cancellation of shares, the sale of shares as part of insolvency proceedings, the repayment of a capital contribution following the company’s judicial liquidation, or the reinvestment of the sale proceeds under the conditions set forth in the General Tax Code.

In other cases, if the shares are sold before the expiration of the five-year period required to qualify for the Madelin tax reduction, the deductible loss is limited to the purchase price of the shares, less the tax reduction received. The amount of the tax reduction received must be calculated and reported in box 8TF of Form 2042-C.

What is the tax treatment of the allocation, and what tax return should be filed?

The permanent loss is attributable to:

• On gross capital gains from securities in the year of the sale or cancellation of the shares;
• In the event of a surplus, on gross capital gains from securities for the following ten years, including the tenth year.
• By way of exception and at the taxpayer’s option, in the event of cancellation due to judicial liquidation, the deduction may be taken in the year the order initiating such liquidation is issued.
• Depending on each taxpayer’s specific circumstances, losses are generally reported as follows:

*Where year N is the year in which the shares were sold or canceled

• If the shares have been canceled, you will be asked to include the following with your declaration:

(i) the calculation used to determine any loss;

(ii) proof that the judgments have been made public (a copy of an extract from the judgments or of one of the formalities ensuring the publication of such judgments); and

(iii) a copy of a document verifying the number of shares held as of the date of the judgment.

A loss resulting from the sale of shares will be reported in box AN of your IFU, while a loss resulting from the cancellation of shares does not need to be reported on the IFU.

II. For corporations subject to corporate income tax that have invested in stocks

Generally speaking, shares held by a corporate investor subject to corporate income tax are classified as investment securities. However, if they have been recorded as equity securities, a specific tax regime applies. It is up to each investor to determine whether a permanent capital loss can be recognized in their particular situation.

A. For investment securities

• How are unrealized capital losses (non-final losses) treated for tax purposes?

Each year, the book value of the shares (value as of December 31) must be compared to their original cost (purchase price). If the book value is lower than the original cost, the difference is treated as an unrealized loss, which is tax-deductible.

The company may then recognize an impairment provision, representing the loss in value, without the need for any off-balance-sheet adjustments.

• What is the tax treatment of permanent capital losses?

A loss becomes permanent upon the sale or cancellation of the shares (permanent loss). If an impairment allowance had been recognized, it must be reversed.

The permanent impairment loss must be recognized as an expense, without any off-balance-sheet adjustments.

A loss resulting from the sale of shares will be reported in box AN of your IFU, while a loss resulting from the cancellation of shares does not need to be reported on the IFU.

Specific rules may apply if you have received a tax deferral under Section 150-0 B ter of the General Tax Code.

B. For equity securities

 If shares are classified as equity securities, unrealized capital losses (losses that are not yet final) are not tax-deductible. They give rise to an accounting provision that is offset by an off-balance-sheet adjustment. Reversals of these provisions are not taxable.

Permanent capital losses are not tax-deductible. They are recognized in the financial statements and must be adjusted off-balance sheet.