See Also
R. v. Golini, 2016 TCC 174
The sole individual shareholder (“Paul Sr.”) of an Ontario corporation (“Holdco”) received a loan from an accommodation party ("Metropac”). This loan was guaranteed by Holdco, with the guarantee secured by a life insurance policy on Paul Sr.’s life owned by Holdco. The loan terms limited Metropac’s recourse thereunder to realization of such security. The purchase price for the policy had indirectly funded (through four intermediaries) the making of the loan to Paul Sr. Paul Sr. used the loan proceeds to subscribe for preferred shares of another Ontario corporation having full paid-up capital.
After finding that there was a shareholder benefit arising from Holdco permitting its policy to be used to pay off the Metropac loan, C Miller J went on, in the alternative, to find (at para. 139) that if it had been necessary to rely on GAAR, he would have found “there is an abuse of the underlying policy of subsection 84(1) of the Act and the Minister’s assessment of a deemed dividend is correct,” after having noted that the policy of s. 84(1) was “a limitation on returns to shareholders on a tax‑free basis to only the shareholder’s tax paid investment in a corporation, where such investment creates an equivalent increase in the company’s assets or decrease in its liabilities.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) | a loan to a shareholder with recourse limited to an asset pledged by the corporation was a shareholder benefit | 589 |
| Tax Topics - General Concepts - Sham | sham doctrine did not apply to a "minor pretence" | 338 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) | interest deduction on limited recourse loan | 305 |
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | use of corporate asset to create PUC was abuse of s. 84(1) | 250 |
Aylward v. R., 97 DTC 1097, [1997] 2 CTC 2748 (TCC)
The issuance to the taxpayer of shares having a paid-up capital of $350,000 did not give rise to a deemed dividend because they were in respect of past services he had provided to the corporation having an agreed value of the same amount. It was not relevant that the corporation's financial statements did not record the value of the services as a liability.
Administrative Policy
2018 Ruling 2018-0780201R3 - Post-mortem pipeline
CRA provided rulings for a pipeline transaction in which the estate with a resident beneficiary sells a company (Opco) with apparently a real estate business to a Newco for consideration consisting mostly of a note, followed by an amalgamation of the two companies and the repayment by Amalco to the estate of the note over time. These pipeline transactions are to be immediately preceded by transactions in which the estate utilizes Opco's capital dividend account to step up the ACB of a portion of its Opco shares and also to redeem those Opco shares so as to generate a capital loss that can be carried back under s. 164(6).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 84 - Subsection 84(2) | hybrid post-mortem 164(6)/pipeline transactions with 10% per quarter redemptions following 12 months | 396 |
2015 Ruling 2015-0584151R3 - Conversion of Contributed Surplus to PUC
Background.
The central management and control of ACo, which was originally incorporated under the Country A Corporate Act, shifted to Canada. In order to avoid any deemed dividend under paragraph 128.1(1)(c.2), it did not elect under s. 128.1(2)(b)(i) to add the amount of the positive PUC adjustment available to it under s. 128.1(2)(a) in computing its PUC. Its common shares had a nominal value, which had been added to its “Issued Capital” and also had a “Share Premium Account” which among other elements included premiums received by it in excess of the Issued Capital on share issuances (the “Share Issue Surplus”). As a result of a share-for-share exchange, it became a wholly-owned subsidiary of CCo.
Proposed transactions.
- ACo will be continued to Province 2. The Articles of Continuance will provide that the issued common shares in the capital of ACo will be converted into common shares without par value, and that ACo’s Issued Capital will become the initial stated capital of such common shares, and that ACo’s Share Premium Account will be renamed as its “Contributed Surplus Account”.
- Pursuant to the Province 2 Corporate Act, the board of directors of ACo will pass a resolution whereby ACo will add a portion of its Contributed Surplus Account equal to the Share Issue Surplus to its Stated Capital Account in respect of its common shares.
Ruling
Re no s. 84(1) dividend.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Paid-Up Capital | corporate PUC and capital surplus flowed through on a cross-border continuance | 108 |
2014 Ruling 2014-0533601R3 - Spin-off butterfly - subsection 55(2)
A spin-off butterfly reorganization by DC includes a preliminary step for distributing a small portion of DC's retained business from its immediate subsidiary (Subco 1) to DC. This involves Subco 1 selling that business on a taxable basis for a note, and then setting that note off against amounts that became owing by Subco 1 to DC as a result of a stated capital and dividend distribution.
See summary under s. 55(1) – distribution.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) | matching of PUC of cross-shareholdings to match Part IV tax | 152 |
| Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution | spin-off by CCPC under Plan of Arrangement of two businesses/matching of PUC of cross-shareholdings to match Part IV tax/leased property as business property | 978 |
| Tax Topics - Income Tax Act - Section 86 - Subsection 86(1) | new common shares distinct on basis of right to interim financials | 97 |
S4-F3-C1 - Price Adjustment Clauses
Where the consideration received on the transfer of property to which a price adjustment clause that meets the conditions listed in ¶1.5 is in the form of shares and the shares are redeemed before the price is adjusted as a result of the application of a price adjustment clause and the corporation subsequently makes an additional payment as a consequence of that adjustment, the additional payment to the shareholders whose shares were redeemed will be included in the shareholder's income in the year of receipt under subsection 84(3) of the Act.
17 February 2003 External T.I. 2002-0176455 - Amount Added to Paid-up Capital of Shares
Aco holds 30 common shares of Opco (30% of the common shares) having an ACB and PUC of $30 and an FMV of $300 (the net fair market value of all Opco assets being $1,000). A and Aco deal at arm's length with Opco. A (an individual who is the sole shareholder of Aco) transfers all his common shares of Aco (being 30 common shares having an FMV of $300 and ACB and PUC of $30) to Opco in exchange for 30 Opco shares, realizing a capital gain of $270.
There is no deemed dividend under s. 84(1) by virtue of s. 84(1)(b)(i) because the value of Opco's assets increase by $300 when Opco acquires the Aco common shares.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 85.1 - Subsection 85.1(2.1) | 105 |
12 August 1994 External T.I. 9325945 - PAID-UP CAPITAL
Where an individual transfers his 5% shareholding in Opco, having a paid-up capital and ACB of $100,000 and a fair market value of $1 million, to Holdco in exchange for shares of Holdo whose stated capital is limited under s. 24(3)(a) of the Business Corporations Act (Ontario) to $100,000 and an election is filed under s. 85(1) to limit the proceeds of disposition to $600,000, RC is of the view that s. 84(1)(c.3)(iii) is not available. In its view, Holdco used s. 24(3)(a) to set the stated capital of Holdco at $100,000, rather than initially setting the stated capital at a higher figure and reducing it.
23 September 1992 T.I. (Tax Window, No. 24, p. 1, ¶2190)
Where preferred shares having a low paid-up capital are transferred by the shareholder to the corporation in exchange for common shares having a high paid-up capital, s. 84(1) will apply to deem the receipt by the shareholder of a dividend, without any relief under s. 85(2.1).
92 C.R. - Q.27
Where convertible preference shares having a high stated capital and a low paid-up capital are converted into common shares having both a stated capital and paid-up capital equal to the stated capital of the preference shares, s. 84(1) will apply.
1992 June Hong Kong Seminar, Q. B.8 (May 1993 Access Letter, p. 226)
S.84(9) applies for purposes of s. 94(1).
1992 A.P.F.F. Annual Conference, Q. 1 (January - February 1993 Access Letter, p. 49)
Where an individual exchanges all the outstanding common shares of Opco, having a paid-up capital of $500,000 and a fair market value of $600,000, for treasury shares of another class having a stated capital and fair market value of $600,000, he will be deemed under s. 84(1) to receive a dividend of $100,000.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 85 - Subsection 85(2.1) | 73 |
28 August 1991 Memorandum (Tax Window, No. 8, p. 6, ¶1435)
Where preferred shares having a stated capital of $2 million and a paid-up capital of $1 are converted into common shares having a stated capital of $2 million, the net increase in the paid-up capital of the corporation will be deemed to be a dividend.
81 C.R. - Q.6
Where consequences of receiving a s. 84(1) dividend as a result of the paid-up capital of shares issued on a s. 85(1) roll exceeding the fair market value of the property transferred are "extremely harsh", RCT is prepared to consider whether administrative relief is warranted.
Articles
Brussa, "Capital Reorganizations", 1991 Conference Report, c. 16.
Paragraph 84(1)(b)
Administrative Policy
2021 Ruling 2021-0911211R3 - Foreign Takeover
A Canadian corporation contributed its shares of a subsidiary (Merger Sub1) to a Canadian subsidiary as a contribution of capital. It had acquired such shares as the agreed consideration for issuing shares to the shareholders of a non-resident target under a Delaware merger, and was ruled to have a cost for those shares of Merger Sub1 equal to the FMV of the shares that were so issued by it (together with any related costs incurred by it).
CRA ruled that Opco also was able to increase the PUC of its shares in reliance on s. 84(1)(b) in an amount equal to the FMV of those contributed shares.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base | shares issued to a Canadian parent in consideration for it issuing shares on a Delaware merger had a cost equal to such shares’ FMV/ shares transferred on absorptive merger at FMV | 903 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (k) - Subparagraph (k)(ii) | deposit of shares to voting trust arrangement was not a disposition | 40 |
| Tax Topics - General Concepts - Payment & Receipt | borrowing and payment of funds pursuant to an internal payment direction agreement | 49 |
| Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(c) | full cost to sub of shares contributed to it | 289 |
7 October 2016 APFF Roundtable Q. 21, 2016-0655901C6 F - Section 7 and bonus paid in share
After noting that it considers that where a Canadian-controlled private corporation has agreed in writing “to award a bonus based on the employee reaching certain measurable performance objectives and the employer agrees to pay this bonus in shares,” then the value of the shares generally will not be included in the employee’s income when issued by virtue of ss. 7(3)(a) and 7(1.1), CRA addressed the question, can the corporation add the full $50,000 bonus amount to the paid-up capital of the shares it so issues, and stated:
To the extent that the liabilities of the CCPC were reduced by an amount not less than $50,000, subsection 84(1) would not be applicable by reason of the exception in paragraph 84(1)(b).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(a) | s. 7 can govern bonuses paid in shares where discretion ceases prior to the issuance | 266 |
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.1) | 7(1.1) applicable to non-discretionary bonus payable in shares | 178 |
Paragraph 84(1)(c)
Articles
Doron Barkai, Alexander Demner, "Dealing with New Subsection 55(2): Issues and Strategies", 2016 Conference Report (Canadian Tax Foundation), 6:1–56
PUC-streaming under s. 84(1)(c) (pp. 6:45-46)
…CRA has not made any specific comments regarding the potential application of new section 55 to PUC-streaming transactions. …
Fundamentally, since PUC is primarily a class concept this planning requires the use of separate share classes. In its simplest form, PUC of the class of shares to be redeemed can be reduced with a correlating increase in the PUC of another class. On a technical application, paragraph 84(l)(c) would prevent such a migration of PUC from giving rise to a deemed dividend.
Although the strategy is technically defensible, GAAR needs to be considered….
If no other strategy is feasible, consideration should be given to minimizing the risk that a "series of transactions" will be found….
Paragraph 84(1)(c.3)
Administrative Policy
30 October 2002 External T.I. 2002-0146655 - Meaning of Contributed Surplus
Xco, a taxable Canadian corporation and private corporation, reduced its stated capital account and its paid-up capital in respect of a class of shares without making a distribution, at a time that it had an accumulated deficit. It now proposes to pass a resolution transferring its contributed surplus account to its stated capital account for corporate law purposes and to its paid-up capital in respect of the shares for income tax purposes. Xco continues to have an accumulated deficit that exceeds its contributed surplus account. CCRA stated:
[T]he meaning of "contributed surplus" should be based on its meaning under generally accepted accounting principles.
We cannot confirm that a company can, in accordance with generally accepted accounting principles, create "contributed surplus" as a consequence of the reduction in stated capital at a time when it also has an accumulated deficit. If the reduction in stated capital was, in accordance with generally accepted accounting principles, credited against the accumulated deficit for accounting purposes, contributed surplus was not created and any subsequent transfer of amounts from accumulated deficit into stated capital will not fall within the ambit of paragraph 84(1)(c.3) of the Act. The fact that the corporation no longer has an accumulated deficit at the time of the conversion should not have any impact on the applicability of paragraph 84(1)(c.3) of the Act. The issue to be determined is whether contributed surplus was created at the time of the reduction in stated capital.