Redeemable and retractable shares

If a company you are buying or selling has more than one share class, check whether any class is redeemable. Under the Canada Business Corporations Act (CBCA), a share is redeemable if the corporation may purchase or redeem it on the corporation’s demand, or is required by its articles to do so at a specified time or on a shareholder’s demand. Ontario’s Business Corporations Act defines the term in the same two parts.

What limits a redemption

CBCA section 36 lets a corporation purchase or redeem redeemable shares at prices not exceeding the redemption price stated in the articles or calculated by a formula in them, subject to its articles. Section 36(2) bars a payment if there are reasonable grounds for believing the corporation is, or after the payment would be, unable to pay its liabilities as they become due, or that the realizable value of its assets would after the payment be less than the total of its liabilities and the amounts set out in paragraph (b). Ontario’s section 32 is built the same way. This entry covers the CBCA and Ontario’s Act only; check the Act that governs the corporation.

What to ask

• What do the articles say about the redemption price or formula?
• Who can require a redemption, and at what time?
• Could the corporation meet the solvency limit when it pays?
• Does section 84(3) of the Income Tax Act apply? Subject to its exceptions, it deems a corporation resident in Canada to have paid a dividend equal to the amount by which the amount paid on a redemption exceeds the shares’ paid-up capital.

See deemed dividend and the guide on selling the shares of a privately held company.