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Week 3 Notes - Week 3 Notes Corporate Distributions Paid-Up...

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Week 3 Notes Corporate Distributions, Paid-Up Capital, Corporate Surplus Accounts, Deemed Dividends, Winding-Up Objectives Review how corporations are capitalized using debt and equity Review the Corporate Surplus Accounts; specifically, Paid-up Capital (PUC), Capital Dividend Account (CDA) and undistributed surplus Review the tax implications on the Winding-Up of a Canadian Corporation Corporate Capitalization Creating a Corporation: Shareholder owns a corporation through common shares worth their nominal value Need a capital base for the business to acquire assets and conduct business Capital Base Debt (shareholder loan) Equity (additional share capital) Corporate Surplus Balances
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1. Paid-Up Capital (PUC) Tax Concept: Contribution by shareholder from after-tax funds on the initial investment in corporate shares Can be returned to shareholder tax-free Accounting: Share Capital OR Corporate Law: Legal Stated Capital (LSC) does not equal PUC Definition of PUC (ITA 89(1)): Determined in accordance with corporate law (legal stated capital – LSC) However, LSC is adjusted for several specific items (to be discussed during the course) In general, PUC is equal to the “after tax” or “tax paid” value of property PUC is calculated on a “class by class” basis, using an “average”: PUC of shares (per share) = (PUC of class / # of shares in class) Effect of PUC in corporate distribution: Act very protective about amounts added to PUC
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