25 August 2003 External T.I. 2003-0031585 - REPAYMENT OF CONTRIBUTED SURPLUS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether a private corporation can return contributed surplus to a shareholder on a tax-free basis.

Position: Not in the situation described.

Reasons: In circumstances where contributed surplus is paid directly to the shareholder and is not converted into paid-up capital in accordance with paragraph 84(1)(c.3) so that the amount could be returned to the shareholder on a reduction of paid-up capital and where the amount paid to the shareholder would not constitute a dividend under corporate law, subsection 15(1) would require that the amount paid by the corporation to the shareholder be included in computing the shareholder's income.

2003-003158
XXXXXXXXXX T. Lanzer
(613) 957-2129
August 25, 2003

Dear XXXXXXXXXX:

Re: Repayment of Contributed Surplus by a Private Corporation

We are writing in response to your letter of July 23, 2003 wherein you requested our comments on the tax implications of a repayment of contributed surplus by a private corporation under the following circumstances.

Where an individual taxpayer transfers tax-paid assets, such as cash, to a corporation (i.e., not on a section 85 rollover), for shares with low par value, say $0.01 per share, the excess over the par value is recorded as contributed surplus under generally accepted accounting principles.

In your view, where a corporation distributes cash or other assets to the same individual shareholder on account of its contributed surplus, there should be no tax consequences, such as a deemed dividend, since it would be a repayment of tax-paid capital.

You suggest that such a view is consistent with the exception provided in paragraph 84(1)(c.3) of the Income Tax Act, which allows a corporation to convert its contributed surplus into paid-up capital without a deemed dividend arising provided the contributed capital was not the result of the issuance of shares under the rollover provisions in the Act, such as sections 85 and 86.

You have advised, however, that in your scenario the amount of the contributed surplus would be paid directly to the shareholder and would not be converted into paid-up capital in accordance with paragraph 84(1)(c.3) so that the amount could then be returned to the shareholder on a reduction of paid-up capital. You have also advised that the amount paid to the shareholder would not constitute a dividend under corporate law.

Our Comments

We do not agree with your view. Subsection 15(1) would require that the amount paid by the corporation to the shareholder be included in computing the shareholder's income.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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