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Question 25
Convertible preference share of a corporation with a stated capital of $2,000,000 and a paid-up capital, within the meaning of paragraph 89(1)(c) of the Income Tax Act (the "Act" ) of $1 are converted into common shares with a stated capital of $2,000,000. Assuming subsection 5l(l) of the Act applies to this conversion will subsection 84(1) of the Act apply to deem the corporation to have paid a dividend on the conversion?
Revenue Canada's Position
Generally, subsection 84(1) applies where the paid-up capital in respect of a particular class of the capital stock of a corporation is increased by an amount in excess of all reductions in the paid-up capital of the shares of all other classes of its capital stock and the transaction does not involve either the payment of a stock dividend, a net increase in the assets of the corporation or a net decrease in the liabilities of the corporation or certain conversions of contributed surplus into stated capital.
Subparagraph 89(1)(c)(ii) of the Act requires paid-up capital for the purposes of the Act to be "...computed without reference to the provisions of this Act...". As stated in paragraphs 3 and 21 of Interpretation Bulletin IT-463, the computation of paid-up capital for the purposes of the Act primarily involves corporate law, rather than tax law (subject to the exceptions specified in clause 89(1)(c)(ii)(C) of the Act).
In the above example, if, based on the corporate records and documents, there is an increase in paid-up capital for the purpose of the Act of the newly issued common shares in excess of the decrease in paid-up capital for the purposes of the Act of the converted preference shares, Subsection 84(1) of the Act will apply to deem the corporation to have paid a dividend on the shares of the class to which the newly issued common shares belong equal to an amount as calculated in that subsection.
Prepared by: H. WoolleyAugust 28, 1991