Question 32
Contribution of Capital
(a) What is the meaning of "contribution of capital" in paragraph 53(1)(c) of the Income Tax Act (the "Act") and how does it differ from the meaning of "contributed surplus" in paragraphs 84(1)(c.2) and (c.3) of the Act?
(b) Where par value shares are issued for cash in excess of their par value, is the shareholder's cost of the shares determined simply with reference to the purchase price and costs of acquisition or is the excess included as part of the adjusted cost base of the shares only by virtue of paragraph 53(1)(c) of the Act?
Response:
(a) The term "contribution of capital" is not defined in the Act and the Department has not formulated a position with respect to the meaning of the term except in response to particular fact situations. Although an exhaustive definition has not been developed administratively, it is clear that the term is not synonymous with "contributed surplus". To illustrate, for example, a loan or transfer of property to a corporation may qualify as a contribution of capital (albeit one that is excluded from the application of paragraph 53(1)(c) of the Act) but will not necessarily result in any increase in the contributed surplus of the corporation.
Although the term "contribution of capital" may have a broad meaning, certain conditions must be satisfied in order for a contribution of capital to result in an increase in the adjusted cost base of the contributor's shares of the corporation. The contribution must not be one of the excluded types of contributions described in paragraph 53(1)(c) and must result in an increase in the fair market value of the contributor's shares of the corporation.
(b) Subject to the application of specific deeming provisions in the Act (such as subsection 69(1) or 85(1)), the shareholder's cost of such shares would be determined simply with reference to the purchase price and other costs of acquisition of the shares. Thus the excess of the purchase price over the par value of the shares would ordinarily be reflected in the adjusted cost base of the shares without reference to paragraph 53(1)(c) of the Act.
Response prepared by L.A. McCarron-McGuire (originally responded to by Jake Harms as file 7-900410 in May 1990, in response to a question from the Vancouver District Office Study Group)
August 1991File 5-912394