The following is a summary of Marie-Emmanuelle Vaillancourt, “Negative Paid-Up Capital and Subsection 84(4) Reduction”, Tax Topics no. 1894 (June 26, 2008).
What are the tax consequences when a corporation purports to reduce tax paid-up capital (PUC) when PUC is nil? Can a corporation reduce PUC so that it becomes negative? Legal stated capital cannot be negative. The reasoning of the court in Canterra Energy Ltd. v R, 87 DTC 5019 (FCA), and the rule in s 257 of the Income Tax Act (Canada) both suggest that PUC cannot be negative either. The CRA agrees with the latter position as well (1992 APFF Federal Round Table (question 54)).
Is it the case, however, that, because PUC cannot become negative, s 84(4) does not apply to a distribution of legal stated capital when PUC is nil and s 15(1) applies instead? No. “Paid-up capital” occurs three times in s 84(4)(a). The first two occurrences must be to legal stated capital while the third refers to PUC, otherwise s 84(4)(a) would not apply to a corporate stated capital reduction. Given this interpretation, while PUC cannot become negative, a reduction of stated capital can occur when PUC is nil, and any such reduction will be treated as a deemed dividend under s 84(4).
