In the past, Jim has prepared his own tax returns. However, he has some complications for 2020
Question:
In the past, Jim has prepared his own tax returns. However, he has some complications for 2020 and has realized he is not capable of preparing his own tax return any more. As a result, he has engaged you to prepare his 2020 tax return. He has three issues he would like you to address so he can understand how his tax return will be affected.
Issue 1
A few years ago, Jim invested $100,000 in shares of a Canadian-controlled private corporation. Jim’s best friend from high school, Carlos, is the controlling shareholder. Carlos is a chef and the company operated a Spanish restaurant in Toronto. The company was doing very well until the COVID-19 pandemic hit. As with many restaurants, the company has not been able weather the repeated lockdowns because take out sales have not been enough to keep the business going. When the newest lockdown was announced in December 2020, the company was already insolvent and Carlos decided to shut operations down on December 15. Prior to that, all the company’s assets were used in the restaurant business. Carlos expects to wind the company up and does not plan start to carry on business again. Jim’s shares were worthless at the end of December. Jim would like to know if he can get any 2020 tax relief, such as a deduction, for his lost $100,000. He would also like to know if that tax relief is affected if the company does start to carry on business again. Jim is quite saddened by this. He had high hopes when he invested in this restaurant as Carlos’ previous restaurant was a success. Jim realized a capital gain of $40,000 in 2016 on his investment in Carlos’ previous restaurant. This gain was fully sheltered with part of Jim’s capital in gains exemption entitlement.
