10 February 1992 Income Tax Severed Letter 9113735 - Determination of Paid-up Capital under the ITA

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.

Subject: DETERMINATION OF PAID-UP CAPITAL UNDER THE ITA Section(s): 89(1)(c)]

911373
P. Diguer
(613)957-2130

XXX

Attention: XXX

February 10, 1992

Dear Sirs:

Re: Determination of Paid-Up Capital Under the Income Tax Act (Canada) (the “Act”)

We are writing in response to your letter dated May 14, 1991 in which you requested that the Department reconsider its current position regarding the stated capital amount reported by a corporation and its effect on the determination of the paid-up capital of the corporation, for purposes of the Act. The expression paid-up capital as referred to here and subsequently has the meaning assigned by paragraph 89(1)(c) of the Act.

In particular you describe a situation where, in preparing financial statements of a corporation governed by the Business Corporations Act (Alberta) (the “ABCA”), the corporation has added to the stated capital of a class of shares an amount substantially less than the fair market value of the consideration for which shares of that class were issued. You have observed that this type of occurrence arises particularly in situations where the shares are issued by a holding company in exchange for shares of an operating company. In addition, you note that although the provisions of subsection 26(3) of the ABCA now permit the addition to stated capital of an amount less than such fair market value in these circumstances, the provision was formerly more restrictive and appears not to have encompassed many of these types of situations. As a result, the corporation would have been required to add to its stated capital, pursuant to subsection 26(2) of the ABCA, the fair market value of the consideration received for the shares. It is your understanding that although the corporation was required to add the fair market value of the consideration received for the shares it has been the Departments practice to consider the stated capital to be that amount which was in fact recorded in the stated capital account and reported by the corporation notwithstanding the provisions of subsection 26(2) of the ABCA.

You refer to the Departments present position as outlined in paragraphs 3 and 21 of Interpretation Bulletin It-463 dated December 1, 1980, that the starting point for the determination of the paid-up capital of a corporation's class of shares is the stated capital of that class under corporate law which result will, in most cases, be the amount indicated by a corporation's financial statements as the component of its capital stock represented by that class of shares.

You have, upon review of the relevant corporate law concluded that you disagree with our position on this matter and as a result ask that the Department reconsider its present position in favour of an approach that would have the Department consider the stated capital account to be that amount which should have been added to the stated capital account under the ABCA. In support of your views on this matter you have provided a memorandum outlining your arguments.

Comments

We have now had the opportunity to review the material which you have provided and as requested, reconsider our position on this matter. In addition, this matter was also considered in the course of the Departments review of the above referenced interpretation bulletin which review culminated in the release of Interpretation Bulletin IT-463R dated July 12, 1991. The release of IT-463R has resulted in the replacement and cancellation of IT-463. As a result of our review we have concluded that the paid-up capital of a class of shares of a corporation is the amount recorded in the stated capital account for the particular class of shares and reported by the corporation.

We trust our comments will be of assistance.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch