Return of capital
A return of capital is a payment to shareholders made on a reduction of the paid-up capital of a class of their shares. For a corporation resident in Canada, s. 84(4) of the Income Tax Act deems a dividend to the extent the amount paid exceeds the reduction, and under s. 53(2)(a)(ii) the rest lowers the shareholder’s adjusted cost base, subject to exceptions.
Owners can meet this if a company pays out cash before a sale or is reorganized. In the Act it appears as a payment on a reduction of paid-up capital. See the answer on paying a dividend before you sell your shares.
How the Act treats it
- Section 84(4) applies where a corporation resident in Canada reduces the paid-up capital of a class of shares other than by a redemption, acquisition or cancellation, or a transaction described in s. 84(2) or (4.1)
- It deems a dividend equal to the amount, if any, by which the amount paid exceeds the reduction
- Section 84(4.1) deals separately with amounts paid by a public corporation
- Under s. 53(2)(a)(ii), for a share of a corporation resident in Canada, an amount received on a reduction of paid-up capital is deducted from the adjusted cost base of the share, except to the extent it is deemed a dividend
What to ask
Ask what the paid-up capital of each class is, whether the payment was recorded as a reduction of it, and how the company and the shareholders reported it. See paid-up capital and deemed dividend.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of Canada — Justice LawsGovernmentIncome Tax Act, section 84 (deemed dividends)
- 02Government of Canada (Department of Justice)GovernmentIncome Tax Act, section 53 (adjustments to cost base)
- 03Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
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