Hi, I have a question. We have a client (limited company) and the business had 2 shareholders ($50 common shares each). One shareholder decided to leave and was paid 45,000 (cad ). So now the there is only one shareholder left. What would be the accounting treatment for this scenario? Please and thank you
As far I I can see, It is only possible to determine the lawfully correct recording entries when the underlying legal corporate documentation and transactions are properly examined.
As posted, this question could refer to a dozen different circumstances.
(Also, it seems that there will be tax consequences, but exactly what those will end up being I cannot guess from the limited information).
Since there are various significant legal and taxation implications to getting it wrong, the ideal solution to get it right would be for the corporation to have its professional accountant (ie its CPA) take a detailed look.
As @joe.justjoe1 says, there are many things that could affect such a transaction, so it would be best to gather all the information. For instance,
If shareholder “A” bought the shares from shareholder “B”, there would be no tax effect for the corporation. Shareholder B would (probably) just report the capital gain on his T1. Also remember, the shares might qualify for the capital gains exemption, so investigate that possibility. Shareholder A would now own 100% of the shares, and his ACB would be $45,050 unless A & B are related (spouses, etc).
If the corporation bought back the shares (cancelled & retired), there would be deemed dividend (probably $44,950 unless something else affected the PUC value). The corporation must file a T5, and shareholder B would include it on his T1.
Also note that the valuation of $45,000 may be questioned, particularly if A and B are related. Investigate the possibility and consequences of a shareholder benefit (ITA 15(1), I think?).
Can you refer to the legal documents and update this post?
Thank @Nezzer. Yes it’s the 1st scenario where shareholder “A” (from his own pocket) bought the shares from shareholder “B”. A and B are not related (B just wanted out within few months after the venture started). Initially I thought there would be no changes in the books apart from the fact Shareholder “A” is now 100% owner. What would be the journal entries for the ACB? I would really appreciate your input on this. Thanks!
No journal entries for corp as it is not part of the transaction. However, you do have a short year end at the date of the share sale/purchase. Prior to the sale, no one individual controlled the corp. Subsequent to the sale, one shareholder has 100% control. That’s an “acquisition of control”, resulting in a corporate year end.
Exactly as @jhd.hemeon said…
There are concepts and facts to be established or confirmed.
- Classes of Shares + voting vs non-voting
- Percent ownership
- Purchase Price = Amount paid into Treasury
- Fair Market Value of shares / business
- Shareholder Contributions, Shareholder Loans, Shareholder Draw + Retained Earnings and what happens when you sell your shares and/or close all interest in a business.
- Controlling interest +/or executive position
- To whom you sell your shares - family, non-arms length, arms length
- How long you have held your shares. ie - are you eligible for capital gains deduction
- Qualified small business corporation shares
- How the sale was structured - Shareholder A to Shareholder B, redemption, restructure, etc.
In general you want to make sure that there are no traps, gotcha’s, or looming tax consequences.
Here are some links re background info on this topic.
Selling shares in a Canadian Private Corporation
How to minimize taxes when transferring shares in your corporation
Selling Shares of a Private Corporation
A summary of the tax consequences of each option follows:
The Share Repurchase
Sale to Existing Shareholders/Third Party Purchaser
Review Your Unanimous Shareholder Agreement
The Unanimous Shareholder Agreement
Transfer of shares
Region: Ontario Answer # 0250
Share structure and shareholders
On this page
- The share structure of your corporation
- Your corporation’s shareholders
- Shareholders’ meetings
Classes of shares
The articles can allow for one or more classes of shares. There is no limit on the number of classes of shares that can be set out in the articles. If there is more than one class, the rights, privileges, restrictions and conditions for each class must also be indicated in the articles.
If there is only one class of shares, those shares must, as a minimum, have:
the right to vote the right to receive dividends (if the board of directors has declared any) the right to receive the remaining property of the corporation after it is dissolved.
If there are more than one class of shares, each of the three rights have to be assigned to at least one class of shares, but one class does not need to have all three. Also, each right can be given to more than one class.
Qualified small business corporation shares
A share of a corporation will be considered to be a qualified small business corporation share if all the following conditions are met:
- at the time of sale, it was a share of the capital stock of a small business corporation, and it was owned by you, your spouse or common-law partner, or a partnership of which you were a member
- throughout that part of the 24 months immediately before the share was disposed of, while the share was owned by you, a partnership of which you were a member, or a person related to you, it was a share of a Canadian-controlled private corporation and more than 50% of the fair market value of the assets of the corporation were:
- used mainly in an active business carried on primarily in Canada by the Canadian-controlled private corporation, or by a related corporation
- certain shares or debts of connected corporations
- a combination of these two types of assets
- throughout the 24 months immediately before the share was disposed of, no one owned the share other than you, a partnership of which you were a member, or a person related to you
Transferring Business to Family Member in Canada
Selling business shares
There are opportunities clients should certainly take advantage of to shelter or defer the tax on those gains
- By: Gena Katz
- August 10, 2010
the role of valuations in tax planning - Canadian Tax Foundation
entitlement to discretionary dividends or voting control . Finally, price … to CRA , anyone can perform a valuation (a valuation expert is not required). However … owner-manager context of private corporations with thinly traded shares . Similarly, CPA … Valuation Perspective- How You Would Justify a “Freeze Low Sell High”?
purchase and sale of a business - share … - Canadian Bar Association
The views of the CRA on the effect of a condition precedent are consistent with the … controlled private corporation” (“CCPC”) definition, a person who has a right to … If a corporation receives a dividend before selling the shares it holds in the … Where actual dividends are paid, the value of the target corporation will be …
Grimes v R: How Should Family-Controlled Private Shares Be Valued …
Aug 9, 2018 - The Tax Court of Canada considered differing valuations for shares held by a trust … by Mr. Timothy Spencer, a chartered business valuator for the CRA . … a fiduciary obligation to sell her personal controlling shares in order to …
I am trying to understand what your actual concern is.
I am assuming that your role in this is as bookkeeper for the Corporation?
In that case, you should note what others have noted above that there are no bookkeeping entries indicated in what you have said.
However, there is plenty for others to do.
The Corporate Secretary (and the director(s) has a duty to inform, advise and liaise with the corporation’s Lawyer to ensure that the corporate books, share registers, filings etc are promptly and properly recorded, appropriate new resolutions arranged, as it is likely that corporate structure has changes, etc.
In addition the Corporate Secretary should liaise with the corporation’s CPA, to ensure that the proper change of control issues are attended to, new year ends, tax filings etc done, consider tax implications and treatments within the corporation etc, and where necessary, advise on any new accounts or changes needed to accounting records.
Completely separately, the ex-shareholder B would consult with their own CPA regarding their 2019 tax reporting implications for his (maybe) Capital Gain etc
Also separately, remaining shareholder A in his Personal capacity would consult with their own CPA regarding his investment tracking for personal income tax purposes (as eventually he will have to deal with reporting his ultimate disposition in the future).
Ideally, with regards to the corporation, Shareholder A should put on his Director’s hat and deal with things somewhat more diligently.
Thanks everyone for your inputs and it has been great help. All the information provided helped me to understand things better.
@sukhdev_jalaf So what was the outcome? Just curious.
I have a similar situation, however, in my situation the Corporation is buying the shares back from Shareholder B.
To all who are saying there are no bookkeeping entries for this - Share Capital will most likely change if the ex-shareholder’s shares are retired or the corporation is buying back Treasury shares.
And who paid the $45,000? If it came from the corporation, it is a re-purchase of the shares and of course affects the bank, creating an entry.
The main point here is to get the Articles so that any Restrictions apply to the shares, determine the fate of the shares being abandoned, and make sure the CPA is involved, as well as the lawyer so that all is documented correctly for legal and taxation purposes.