6 March 2001 External T.I. 2000-0059535 - reduction of stated 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.

Principal Issues: Does a reduction in legal stated capital of a private corporation's common shares (without a corresponding increase in the legal stated capital of any other class of shares) cause a corresponding reduction in the paid-up capital of the common shares or a change in the adjusted cost base of such shares if no payment is made.

Position: A reduction in the legal stated capital does reduce the paid-up capital of those shares. Provided no payment is made such a reduction it does not result in a change to the ACB.

Reasons: The law

XXXXXXXXXX 2000-005953

March 6, 2001

Dear XXXXXXXXXX:

Re: Reduction of Stated Capital

This is in response to your facsimile dated December 1, 2000, wherein you requested our opinion on the application of the Income Tax Act ("the Act") in the following situation.

In your letter you indicate that a "Canadian controlled private corporation" ("CCPC"), as that term is defined in subsection 125(7) of the Act, will reduce the legal stated capital of its common shares without any payment to its shareholders and without any increase in the legal stated capital of any other class of its shares. You have also advised that the paid-up capital of the common shares is equal to their legal stated capital. Your question is whether such a reduction in legal stated capital of the CCPC's common shares will cause a corresponding reduction in the paid-up capital of the common shares or a change in the adjusted cost base of such shares. You also ask if there are any other income tax consequences that need to be considered as a result of the above.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R4 (IC-70-6R4) dated January 29, 2001. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. We can, however, provide the following comments.

A reduction in the legal stated capital account of a class of shares of a corporation produces a corresponding decrease in the "paid-up capital" of that class of shares since the starting point in the calculation of paid-up capital, as defined in subsection 89(1) of the Act, is the legal stated capital of the shares (see paragraphs 2 and 3 of Interpretation Bulletin IT-463R dated July 12, 1991 - "IT-463R"). Where the reduction in the legal stated capital account, and hence paid-up capital, of a class of shares of a corporation is made without any payment of cash or distribution of property by the corporation such reduction would not, in an by itself, result in a deemed dividend under subsection 84(4) of the Act, nor would such reduction, in and by itself, result a reduction in the adjusted cost base of the shares of the corporation under paragraph 53(2)(a) of the Act.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R4.

Yours truly,

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