Can Paid-Up Capital be distributed tax-free?

Yes. Subject to the Income Tax Act, PUC may generally be returned to shareholders without tax, unlike dividends.

Why issue different classes of shares?

To ensure each shareholder’s PUC reflects their actual investment, protecting their ability to receive tax-free returns.

Can Stated Capital be higher than PUC?

Yes. Stock dividends, rollovers, surplus transfers, and certain CBCA transactions can increase Stated Capital without increasing PUC.

Does this apply to both federal and Ontario corporations?

Yes, but specific rules differ slightly between the CBCA and OBCA.

Is this planning only relevant to large corporations?

No. Small and mid-sized private corporations can benefit significantly, especially those seeking tax-efficient returns of capital or preparing for future reorganizations.

What is a corporation’s Stated Capital Account?

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.

What is a corporation’s paid up capital (PUC) account?

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).

Are the amounts in a corporation’s Stated Capital Account and Paid Up Capital (PUC) accounts the same?

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.

What are the circumstances under which the Stated Capital Account is less than the PUC account?

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.

How can I use a corporation’s Stated Capital and Paid Up Capital accounts for achieve tax savings?

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.

Paid-Up Capital & Stated Capital Tax Planning | Corporate Tax Lawyers Toronto

Paid-Up Capital and Stated Capital – How These Tools Can Be Used in Advanced Tax Planning

Business owners often want to know:

What are Paid-Up Capital and Stated Capital, and how can they save me tax?

While both concepts relate to how capital is contributed to a corporation, they are governed by different legislation and can diverge in value. When managed effectively, this divergence can enable tax-efficient distributions and powerful corporate planning opportunities.

What Is a Stated Capital Account?

Under the Ontario Business Corporations Act (OBCA) or the Canada Business Corporations Act (CBCA), every corporation must maintain a Stated Capital Account for each class and series of shares.

In simple terms, the Stated Capital Account reflects the value the corporation receives from shareholders when shares are issued.

Example

If a shareholder buys 100 common shares at $1 each, then:

Cash paid in: $100
Stated Capital Account increases to: $100
Paid-Up Capital (PUC) per share: $1

If 200 new investors later invest $20,000, then:

Total consideration received: $20,100
Total shares issued: 300
PUC per share now increases to $67

This means the original 100 shares now carry $6,700 of PUC—a substantial tax advantage—while new shareholders must share in the same total, diluting their future tax-free return of capital.

To avoid this, many corporations issue new classes of shares for new investments, allowing PUC to remain aligned with what each shareholder actually contributed.

How Stated Capital Differs from Other Corporate Accounts

Stated Capital is not the same as:

Retained earnings
Contributed surplus
Capital Dividend Account
GRIP or LRIP pools

These are accounting or tax pools. Stated Capital exists under corporate law, and its value forms the legal foundation for calculating Paid-Up Capital under the Income Tax Act.

What Is Paid-Up Capital (PUC)?

PUC is the tax law concept and represents the amount a shareholder has paid for their shares under the Income Tax Act (ITA).

Why does this matter?

PUC can generally be returned to shareholders tax-free, unlike most corporate distributions, which are taxable dividends or benefits.

PUC always starts with the Stated Capital, and while it may be adjusted downward, PUC can never exceed Stated Capital.

How Stated Capital and PUC May Diverge

It is common for the two values to diverge due to specific transactions.

1. Increases to Stated Capital

Certain transactions may increase Stated Capital without increasing PUC, including:

Section 85 Rollovers

When a shareholder transfers property to a corporation on a rollover, the corporation may increase its Stated Capital, while the PUC is limited to the adjusted cost base.

Stock Dividends

If a corporation pays shareholders with additional shares instead of cash, it may increase Stated Capital for the relevant share class.

Reallocation from Surplus

A corporation may also transfer amounts from surplus accounts into Stated Capital, potentially enabling a future tax-free extraction of capital, particularly in holding-company structures.

High-Low Shares (CBCA s.26(3))

The CBCA also allows corporations to issue:

Shares with low PUC, but
High redemption value

These shares are commonly used in tax planning to:

Convert capital gains into deemed dividends
Take advantage of dividend-deductible treatment between Canadian corporations

2. Reductions in Stated Capital

Under CBCA s.38(1), Stated Capital may be reduced to:

Eliminate unpaid share liabilities
Distribute value back to shareholders
Remove capital not represented by real assets

When shares are redeemed or repurchased:

Stated Capital must be reduced proportionately
Distributions may flow to shareholders tax-free to the extent of PUC

Other Situations Where PUC Matters

PUC plays a key role in reorganizations under the Income Tax Act, including:

Section 85(2.1) Transfers

PUC of new shares is limited to the adjusted cost base of property transferred, allowing that value to be later returned tax-free.

Section 86 Share Exchanges

When shares are converted, the PUC of the new shares must match the PUC of the exchanged shares, preventing artificial tax-free distributions.

Amalgamations (s.87(3))

When corporations merge, PUC from the predecessor corporations is aggregated so that:

PUC remains consistent
No unintended step-up is created

Why This Matters: Using PUC for Tax-Efficient Planning

Because PUC can be distributed tax-free, structuring transactions to maximize or preserve PUC can create substantial tax advantages, such as:

✔ Tax-free return of capital
✔ More efficient intercorporate distributions
✔ Protection of early shareholders from dilution
✔ Structuring exits and reorganizations tax efficiently
✔ Improving after-tax cash flow from corporate assets

This is one of the few legal mechanisms that allows shareholders to withdraw corporate value without triggering a dividend or capital gain.

Speak With a Corporate Lawyer

Managing Paid-Up Capital and Stated Capital correctly requires a detailed understanding of:

Corporate legislation (OBCA, CBCA)
Income Tax Act rules
Transaction-specific opportunities
Long-term shareholder planning

Kalfa Law Firm helps corporations structure:

New investments
Reorganizations
Share transactions
Tax-efficient dividends and redemptions
Sections 85 and 86 restructurings
Holding-company and succession strategies

Contact us today to speak with a corporate tax lawyer about leveraging PUC and Stated Capital to strengthen your corporate tax strategy.

FAQs

-Shira Kalfa, BA, JD, Partner and Founder

Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.

The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.