Paid-up capital

Where the number comes from

The CRA’s archived bulletin on the topic explains that paid-up capital is worked out class by class. The starting point is the stated capital of the class under the corporate law that governs the company. The Income Tax Act then adjusts that amount in particular situations, such as certain share exchanges and amalgamations, so the tax figure can differ from the accounting figure.

Not everything a shareholder puts in counts. The same bulletin says amounts contributed without receiving shares, and premiums on a share issue, are not part of paid-up capital unless they form part of stated capital under corporate law. A loan from a shareholder is a separate matter again; see the shareholder loan entry.

The bulletin is archived, so the CRA is not updating it. Treat it as background and confirm current treatment with your accountant.

Why it matters when money comes back out

PUC is a tax-free reference point. When a corporation redeems, acquires or cancels its own shares (other than by an ordinary open-market purchase), the CRA’s deemed dividend guidance says the amount paid, less the paid-up capital of those shares, is generally a deemed dividend. A reduction in paid-up capital of a class is also dealt with by calculating the payment less the decrease.

The CRA covers deemed dividends in its T5 slip guidance, so a deemed dividend is generally reported on a T5 slip and included on the shareholder’s personal return.

An illustrative example

A founder subscribes $100 for 100 common shares, so the class has paid-up capital of $100. Years later the corporation redeems all the shares for $50,000. Ignoring other rules, the amount above PUC, $49,900, is generally a deemed dividend. The $100 is the PUC portion.

This is a simplified illustration. Other provisions can change the outcome, particularly where shares were issued in an exchange or the holders are connected.

What to discuss with your accountant

Ask how paid-up capital is recorded for each share class and where the running figure is kept. Bring the articles, share certificates, subscription records and minutes for every share issue, redemption or reorganization.

Raise paid-up capital before you redeem shares, reorganize ownership or bring in a new shareholder. It is much easier to plan the figure than to reconstruct it afterwards.