Revised to January 23, 1990
P1469. v7 INCOME TAX ACT
Paid-up Capital
IT-463R Paragraph 89(1)(c)
APPLICATION
This Bulletin replaces and cancels Interpretation Bulletin IT-463 dated December 1, 1980 and discusses the definition of paid-up capital of a corporation after March 31, 1977. Where it is necessary to determine the paid-up capital before that date, please refer to the law itself.
SUMMARY
This bulletin discusses the definition of the paid-up capital of a class of shares under the Income Tax Act. The paid-up capital of a share, as well as 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 among the circumstances which can lead to a difference between the amount initially calculated for corporate purposes and paid-up capital for income tax purposes.
DISCUSSION AND INTERPRETATION
1. The paid-up capital in respect of a class of shares of the capital stock of a corporation is defined in subparagraph 89(1)(c)(ii). Subparagraphs 89(1)(c)(i) and (iii) depend upon that definition in the determination, respectively, of 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 are examples of events where one or both of 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 paragraph 89(1)(c).
2. Since clause 89(1)(c)(ii)(C) provides that the determination of the paid-up capital in respect of a class of shares is to start with an amount computed without reference to the provisions of the Income Tax Act, the calculation of that amount is made with reference to the relevant corporate law rather than tax law.
The amount so calculated under corporate law is often referred to as the "stated capital" of the class of shares. This amount of stated capital is subject to adjustment by specific provisions (see 7 below) of the Income Tax Act in order to finalize the determination of the paid up capital of the class of shares for income purposes.
The amount of the stated capital for a particular class of shares will often be the amount indicated on a corporation's financial statements, under capital stock in respect of that class of shares.
3. The stated capital account will reflect:
(a) the par value of shared 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.
4. Amounts contributed by shareholders that are not allocated to share capital will form part of contributed surplus. Premiums received for a particular share issue will also constitute part of contributed surplus rather than stated capital, unless the applicable corporate law provides otherwise.
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 clause 89(1)(c)(ii)(C) by reading the references to "class" as references to "series of the class" in accordance with subsection 248(6).
6. Where the stated capital account in respect of a class of shares is maintained in a foreign currency, in determining the paid-up capital of that class of shares entries to that account will be converted to the Canadian dollar equivalent, computed the exchange rates prevailing at the time of the transaction giving rise to the particular entry.
7. At the date of publication of this bulletin the provisions of the Act which, pursuant to clause 89(1)(c)(ii)(C), will adjust stated capital in determining paid-up capital for income tax purposes are sections 84.1, 84.2 and 212.1, and subsections 66.3(2) and (4), 85(2.1), 85.1(2.1), 87(3) and (9), 138(11.7), 192(4.1) and 194(4.1).
Therefore, where a corporation 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 may be less than the stated capital reported on the financial statements. Please refer to the law itself to determine when the particular adjustments became applicable.