Share redemption
A share redemption is a corporation buying back shares it issued from a shareholder. The CBCA lets a corporation redeem redeemable shares at prices not exceeding the price or formula in its articles, subject to a solvency test, and under section 84(3) of the Income Tax Act the amount paid above the shares’ paid-up capital is, subject to exceptions, deemed a dividend.
An owner meets a redemption when a company, not a buyer or a co-owner, pays out a departing shareholder. It is a transaction between the shareholder and the corporation itself. Two sets of rules apply: the corporate statute under which the company exists, and the Income Tax Act.
Corporate-law limits
- Federal: the Canada Business Corporations Act s.34 lets a corporation buy its shares subject to its articles and a solvency test, with exceptions in s.35; s.36 covers redeemable shares at a price within the articles’ price or formula, subject to its own test in s.36(2).
- Ontario: the Business Corporations Act ss.30 to 32 set a similar scheme for Ontario corporations.
- Other provinces run their own Acts, so check the one your company was incorporated under.
Tax result and questions
CRA’s Folio S3-F2-C2 says that under subsection 84(3) a dividend is deemed to be paid on a redemption. Ask what the shares’ paid-up capital is and whether the solvency test is met. For the tax label, read deemed dividend; for the share-sale route, see selling the shares of a private company.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of Canada (Department of Justice)GovernmentCanada Business Corporations Act, R.S.C. 1985, c. C-44
- 02Government of OntarioGovernmentBusiness Corporations Act, R.S.O. 1990, c. B.16
- 03Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
- 04Canada Revenue AgencyGovernmentIncome Tax Folio S3-F2-C2, Taxable Dividends from Corporations Resident in Canada
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