Example 1
Son claims an ABIL under s. 50(1) with respect to his share investment in a wholly-owned corporation (Lossco), which had ceased active business operations in the year, and then transfers his shares of Lossco at the beginning of the following year to a corporation wholly-owned by his Father (Profitco) for consideration of $1, with Lossco then being wound-up into Profitco under s. 88(1).
Example 2
Brothers A and B each hold 50% of the common shares of Lossco, which had ceased active business operations in the year, with Brother B claiming a BIL under s. 50(1). Brother B then transfers his shares of Lossco at the beginning of the following year to a corporation wholly-owned by Brother A (Profitco), Brother A sells his shares of Lossco to Profitco for their fair market value, and Lossco is liquidated into Profitco under s. 88(1).
Before addressing the loss transfer issue raised in the question (and further noting that the transfer by Brother B of his Lossco shares to Profitco gave rise to a capital loss (i.e., not a business investment loss) subject to the loss being limited by s. 69(1)(b)), CRA indicated that it was "not evident" that the conditions in s. 50(1)(b)(iii) for realizing a capital loss under s. 50(1) were satisfied in either example, stating (TaxInterpretations translation):
...[I]t is necessary to attribute to the word "insolvent" its ordinary meaning, as this term is not defined in the ITA. A dictionary definition defines the term 'insolvent" as follows: "Being no longer able to pay one’s debts." Consequently, a corporation which has neither assets nor liabilities at the end of a taxation year (or, in any event, has no liabilities at that time) cannot generally be considered insolvent for purposes of ITA subparagraph 50(1)(b)(iii).
The condition provided in clause 50(1)(b)(iii)(C) is that the fair market value of the shares which are subject to the election under subsection 50(1) must be nil. In this regard, it appears to us that the valuation of the shares in the situations described above would normally take into account the accumulated tax losses which can eventually be deducted in the computation of a corporation's income.