A corporation’s Stated Capital Account represents the consideration or payment received by the corporation from its shareholders in exchange for the issuance of its shares. For example, if a shareholder subscribes for and purchases 100 common shares in a corporation’s capital, and each share is purchased for $1.00, then the shareholder will pay $100 into the Stated Capital Account and the PUC per share will be $1.00.
Paid-Up-Capital or PUC is a concept under the federal Income Tax Act (ITA). PUC is the precise amount a shareholder pays for his or her shares. Generally speaking, PUC can be returned to shareholders free of tax. The Stated Capital Account holds the corporation’s Paid-Up-Capital (PUC).
The Stated Capital Account can increase to a figure larger than the PUC under certain circumstances. For example, the Stated Capital Account will increase in the following circumstances:
- When shares are issued to a shareholder in exchange for a non-cash consideration in non-arms-length transactions, such as a transfer of property into the corporation under a section 85 rollover.
- When a corporation issues a stock dividend, being a dividend payment made in the form of additional shares, rather than a cash payout.
- When a corporation has credited to other surplus accounts. Increases in stated capital sourced from contributed surplus may facilitate a tax-free return of capital if strategically used between a holding corporation and its subsidiary operating corporation.
- When the corporation makes certain non-arm’s length transactions, pursuant to certain amalgamation agreements, whereby it adds to stated capital an amount that is less than the consideration received for the shares issued pursuant to the transaction. The provision under the CBCA allows for the issuance of “high-low shares,” which are shares that have a low PUC but high redemption amount.
Reductions from stated capital may occur under subsection 38(1) of the CBCA for the purpose of reducing or extinguishing liabilities in respect of an amount unpaid on any share, making a distribution to a shareholder, or reducing the stated capital by an amount that is not represented by realizable assets.
Reductions or increases to the Stated Capital Account can be a useful tax planning tool as the distribution from PUC is one of the few distributions from a corporation that occurs on a tax free or tax neutral basis. For these reason, knowing how to manipulate the PUC in the context of various transactions can create a host of beneficial tax opportunities.
