31 March 1993 Income Tax Severed Letter 3M05210-54 - APFF 1992: Question 54—Negative paid-up capital

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 Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                     TRANSLATION FROM FRENCH

ASSOCIATION DE PLANIFICATION FISCALE ET FINANCIFERE

                   REVENUE CANADA ROUND TABLE

1992 CONFERENCEASSOCIATION DE PLANIFICATION FISCALE ET FINANCIFERE
                   REVENUE CANADA ROUND TABLE
                          October 1992

Question 54

Negative paid-up capital

Can the Department of National Revenue indicate its administrative policy concerning the application of section 257 of the Act to the various sections of the Act that do not contain "algebraic formulas" but otherwise include a method of calculation. For example, division 89(1)(c)(ii)(C) establishes that the paid-up capital of a class of shares is determined by taking into account certain provisions of the Act, including section 84.1 which contains an algebraic formula. Given that division 89(1)(c)(ii)(C) does not really contain an "algebraic formula", could there be a class of shares for which the paid-up capital for tax purposes would be a negative amount?

Department of National Revenue response

We are of the view that for tax purposes the paid-up capital of a class of actions cannot be negative.

Calculation of paid-up capital with respect to a class of the capital stock of a corporation is made in accordance with division 89(1)(c)(ii)(C) and certain other provisions of the Act referred to therein, in particular subsections 84.1(1) and 85(2.1). In these other provisions, the words "... shall be deducted..." require the deduction of an amount in calculating the paid-up capital in certain situations.

It may be considered that the paid-up capital is calculated in accordance with an algebraic formula, in which case, section 257 applies and the result of this calculation cannot be negative. If, on the other hand, the calculation is not considered to be made according to an algebraic formula, we are of the opinion that the rule in Canterra Energy Limited v. The Queen, 87 DTC 5019 (Federal Court of Appeal) applies. According to this decision, a technical or non-technical meaning must be given to an expression according to its context. The Court found that the word "minus" in subparagraph 1207(2)(a)(ii) of the Regulations had a technical meaning and that, accordingly, the result of the mathematical operation could be negative. The corollary of this, when the word "minus" has a non-technical meaning, is succinctly expressed in the following excerpt from the judgment of Urie J:

"It is not used in its non-technical sense which, no matter what non-technical meaning is attributed to it, it is compared in all the dictionaries to which we referred to, to the word less. That word clearly implies a subtraction of something from the whole and does not contemplate the result being a negative amount..."

It is our view that, if the calculation is not considered to be made in accordance with an algebraic formula, the words " ... shall be deducted...", which imply subtraction, should be given a non-technical meaning, given the context in which they are used and that, accordingly, the result of the operation cannot be negative.