ARCHIVED - Paid-up Capital
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NO: IT-463R2
DATE: September 8, 1995
SUBJECT: INCOME TAX ACT
Paid-up Capital
REFERENCE: Definition of "paid-up capital" in subsection 89(1) (also subsections 84(10) and (11) and paragraphs 84(1)(c.1), (c.2) and (c.3))
Notice -- Bulletins do not have the force of law
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Paid-up Capital
Contents
Application
This bulletin replaces and cancels Interpretation Bulletin IT-463R dated July 12, 1991. It discusses the definition of paid-up capital of shares of the capital stock of a corporation after March 31, 1977. Where it is necessary to determine the paid-up capital before that date, please refer to the provisions of the former law as applicable before that date.
Summary
This bulletin discusses the definition of the paid-up capital of a class of shares under the Income Tax Act. Both the paid-up capital of a share and the paid-up capital of all the shares of a corporation are determined from the calculation of the paid-up capital of each class of shares. Since April 1, 1977, paid-up capital has been determined by the relevant provisions of the appropriate corporations act, subject to the application of certain provisions of the Income Tax Act. The issue of flow-through shares in the resource industry sector, the issue of shares as consideration for shares or other property, or the issue of shares on an amalgamation are some of the circumstances that can lead to a difference between the stated capital for corporate purposes and paid-up capital for income tax purposes. The bulletin also discusses converting contributed surplus into paid-up capital.
Discussion and Interpretation
General
¶ 1. The paid-up capital for a class of shares of the capital stock of a corporation is defined in paragraph (b) of the definition of "paid-up capital" in subsection 89(1). Paragraphs (a) and (c) of the definition of "paid-up capital" depend on the definition in paragraph (b) to determine, respectively, the paid-up capital of a single share in a particular class and of all the shares of a corporation. The amalgamation of Canadian corporations and the redemption of shares generally are examples respectively of events where the paid-up capital of all the shares of a corporation and the paid-up capital of a single share of a corporation are relevant. Apart from the meaning of "share", which is provided in subsection 248(1), the applicable corporate law must be referred to for the meaning of terms such as "class of shares" and "issued shares" that are used in the definition of "paid-up capital" in subsection 89(1).
¶ 2. Since subparagraph (b)(iii) of the definition of "paid-up capital" provides that the amount of the paid-up capital of a class of shares is initially determined without reference to the provisions of the Income Tax Act, the calculation is based on the relevant corporate law rather than tax law. The amount calculated under corporate law is usually referred to as the "stated capital" of the class of shares. The stated capital is subject to adjustment by specific provisions (see ¶ 7 below) of the Income Tax Act in order to determine the paid-up capital of the class of shares. The amount of the stated capital for a particular class of shares is often indicated on a corporation's financial statements.
¶ 3. In regard to the issuance of shares, the stated capital account reflects
(a) the par value of shares issued with a par value,
(b) the amount ascribed by the directors for shares issued without par value or, in some jurisdictions, the fair market value of the consideration received for shares issued without par value,
(c) a reduction for discounts granted (where permitted) for par value shares, and
(d) a reduction for unpaid amounts (where permitted) for any issue.
In addition, certain actions that a corporation takes after issuing shares may affect stated capital as determined under applicable corporate law.
¶ 4. Neither amounts contributed by shareholders that are not represented by issued shares, nor premiums received for a particular share issue constitute part of paid-up capital under subparagraph (b)(iii) of the definition of "paid-up capital" unless it forms part of stated capital under the applicable corporate law.
¶ 5. A corporation may issue shares of a class of its capital stock in more than one series; e.g., series 1, 2 and 3 of Class A preference shares. The paid-up capital of a series of a class of shares is determined under subparagraph (b)(iii) of the definition of "paid-up capital" by reading the references to "class" as references to "series of the class", in accordance with subsection 248(6).
¶ 6. In determining the paid-up capital of a class of shares where the stated capital account of the class is maintained in a foreign currency, entries to that account are converted to the Canadian dollar equivalent calculated at the exchange rates prevailing at the time of the transaction that gives rise to the particular entry.
¶ 7. Subparagraph (b)(iii) of the definition of "paid-up capital" provides for certain adjustments to stated capital in determining paid-up capital for income tax purposes. These adjustments are described in sections 84.1, 84.2 and 212.1 and subsections 51(3), 66.3(2), 66.3(4), 85(2.1), 85.1(2.1), 86(2.1), 87(3), 87(9), 128.1(2), 128.1(3), 138(11.7), 192(4.1) and 194(4.1). (Please refer to the law to determine when the particular adjustments became applicable.) In general terms, where a corporation has migrated to Canada or has issued
(a) flow-through shares,
(b) shares as consideration for shares or other property (see the current version of IT-291, IT-450 and IT-489),
(c) shares as a result of an amalgamation (see the current version of IT-474), or
(d) shares for tax-credit purposes, e.g., shares issued in connection with the Scientific Research and Experimental Development Tax Credit,
the potential exists that the paid-up capital for income tax purposes is less than the stated capital reported on the financial statements.
¶ 8. A corporation that is a cooperative corporation (as defined by subsection 136(2)) or a credit union (as defined in subsection 137(6)) may be incorporated under a statute which does not provide for paid-up capital for a class of shares. Paragraph (b) of the definition of "paid-up capital" provides that, after 1988, the paid-up capital for a class of shares of such a cooperative corporation or credit union is, at the time of its calculation, the aggregate of all amounts received by the corporation for shares of that class issued and outstanding at that time, minus the portion of such amounts repaid by the corporation to persons who held any of the issued shares of that class before that time. The potential adjustments to stated capital in determining paid-up capital described in ¶ 7 above can apply to the calculation of paid-up capital for a class of shares for such a cooperative corporation or credit union.
¶ 9. In the circumstances described in paragraphs 84(1)(c.1), (c.2) and (c.3), contributed surplus of a corporation can be converted into paid-up capital without resulting in a dividend being deemed to be received by a shareholder who held any of the issued shares of the class whose paid-up capital was increased.
Paragraph 84(1)(c.1) applies to actions of an insurance corporation occurring after 1978 which convert contributed surplus related to its insurance business. Where an insurance corporation received property by way of a rollover to which subsection 85(1) or 138(11.5) applied, subsection 138(11.9) provides rules concerning the calculation of contributed surplus for the purposes of paragraph 84(1)(c.1).
Paragraph 84(1)(c.2) applies to actions of a bank occurring after November 30, 1980 which convert contributed surplus that arose on the issue of its capital stock.
Paragraph 84(1)(c.3) applies to actions of a corporation, that is neither an insurance corporation nor a bank, which convert into paid-up capital of a class of shares contributed surplus (that arose after March 31, 1977) in the manner described in (a), (b) or (c) below:
(a) where the conversion to paid-up capital occurs after 1987, on the issue of shares of that class or shares of another class for which the shares of that class were substituted other than where section 51, 66.3, 84.1, 85, 85.1, 86, 87 or 212.1 or subsection 192(4.1) or 194(4.1) applied on the issue,
(b) where the conversion to paid-up capital occurs after July 13, 1990, on the acquisition of property by the corporation from a person who, at the time of acquisition, held any of the issued shares of that class of shares or shares of another class for which shares of that class were substituted for no consideration or for consideration that did not include shares of the corporation, or
(c) where the conversion to paid-up capital occurs after December 20, 1992, as a result of any action by which the paid-up capital for that class of shares or for shares of another class for which shares of that class were substituted was reduced by the corporation, to the extent of the reduction in paid-up capital that resulted from such action. For actions of a corporation occurring after July 13, 1990 and before December 21, 1992, this conversion of contributed surplus into paid-up capital applied where contributed surplus resulted from the reduction by the corporation of the paid-up capital of a class of shares or of shares of another class for which shares of that class were substituted.
When the amount of contributed surplus is determined after July 13, 1990, subsection 84(10) limits the amount of contributed surplus that a corporation can convert into paid-up capital under paragraph 84(1)(c.3) where the corporation when it was a public corporation has paid a dividend that exceeded its retained earnings immediately before the payment of the dividend.
For conversions of contributed surplus into paid-up capital occurring after December 20, 1992, subsection 84(11) limits the amount of contributed surplus that can be considered to have arisen under subparagraph 84(1)(c.3)(ii) (described in (b) above). The limitation may arise when the property acquired by a corporation is shares of another corporation resident in Canada and, immediately afterward, the two corporations are connected within the meaning of subsection 186(4).
¶ 10. When a corporation receives an amount for granting an option to acquire shares of its capital stock and the option is subsequently exercised, the amount received for granting the option may become part of the paid-up capital of that particular class of shares to which the option pertains.
Explanation of Changes
Introduction
The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.
Overview
Interpretation Bulletin IT-463R2 discusses the definition of "paid-up capital" of a class of shares under the Income Tax Act. The paid-up capital of a single share and all of the shares of a corporation are calculated from the paid-up capital of a class of shares. Paid-up capital is determined by reference to the appropriate corporations act, subject to the application of certain provisions of the Income Tax Act.
This bulletin reflects amendments to the Income Tax Act resulting from S.C. 1994, c. 7, Schedule II (1991, c. 49 -- formerly Bill C-18) and S.C., 1994, c. 21 (formerly Bill C-27).
Legislative and Other Changes
The Summary has been amended to note that the bulletin also discusses the conversion of contributed surplus into paid-up capital.
¶ 7 has been amended to reflect the Bill C-27 amendment to the definition of paid-up capital to add references to subsections 51(3), 86(2.1) and 128.1(2) and (3) as possible adjustments to stated capital in determining paid-up capital.
¶ 8 replaces the previously italicized note concerning a calculation of the paid-up capital for certain cooperative corporations and credit unions.
New ¶ 9 describes paragraphs 84(1)(c.1), (c.2) and (c.3) which permit the conversion of "contributed surplus" into "paid-up capital". The paragraph also describes subsections 84(10) and (11) which may affect the operation of paragraph 84(1)(c.3).
New ¶ 10 comments on the paid-up capital arising from the granting and subsequent exercise of an option.
Throughout the bulletin we have changed some of the wording to improve clarity.
Notice -- Bulletins do not have the force of law
At the Canada Customs and Revenue Agency (CCRA), we issue income tax interpretation bulletins (ITs) in order to provide technical interpretations and positions regarding certain provisions contained in income tax law. Due to their technical nature, ITs are used primarily by our staff, tax specialists, and other individuals who have an interest in tax matters. For those readers who prefer a less technical explanation of the law, we offer other publications, such as tax guides and pamphlets.
While the comments in a particular paragraph in an IT may relate to provisions of the law in force at the time they were made, such comments are not a substitute for the law. The reader should, therefore, consider such comments in light of the relevant provisions of the law in force for the particular taxation year being considered, taking into account the effect of any relevant amendments to those provisions or relevant court decisions occurring after the date on which the comments were made.
Subject to the above, an interpretation or position contained in an IT generally applies as of the date on which it was published, unless otherwise specified. If there is a subsequent change in that interpretation or position and the change is beneficial to taxpayers, it is usually effective for future assessments and reassessments. If, on the other hand, the change is not favourable to taxpayers, it will normally be effective for the current and subsequent taxation years or for transactions entered into after the date on which the change is published.
If you have any comments regarding matters discussed in an IT, please send them to:
Manager, Technical Publications and Projects Section
Income Tax Rulings Directorate
Policy and Legislation Branch
Canada Customs and Revenue Agency
Ottawa ON K1A 0L5
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