Funds loaned to the corporation is debt financing.
Loan details regarding interest rate, term, callable, etc is specified at the time of the loan. This is separate and distinct from buying shares. The terms such include interest rate, interest payment dates, the term of the loan, if and the loan principal is when callable, and any liens against property.
There are some special rules, Tax Court cases, and administrative policies when loans are non-arms length, related person, and related corporation.
Selling shares is equity financing.
Shares can be issued at any price and are a proportional claim based on units against dividends issued to that class of shares.
Shares give you a ranked and proportional ownership claim on assets. Preferred first. Common second. Proportional to % of units shares. This is based on units.
When issuing new shares at a new valuation there could be a freeze, rollover, reorganization, or deemed dividends.
Important concepts include stated capital, paid-up capital, and adjusted cost base.
A corporation’s stated-capital account tracks the consideration that the corporation received in exchange for issuing its shares—in other words, the account tracks the amount paid by the shareholder to the corporation. The corporation will keep a separate stated-capital account for each class or series of shares. And proper accounting should allow you to discern the stated capital for each issued share.
Paid Up Capital (PUC)
Paid up capital (PUC) measures the contributed capital and capitalized surpluses that a corporation can return to its shareholders on a tax-free basis.
Adjusted Cost Base (ACB)
The adjusted cost base (ACB) is the shareholder’s tax cost for purchasing the shares.
This is a complex topic and, in my opinion, too detailed and complex for the forum.
None the less here are some steps, topics, and references to consider.
- Refer to freezing, thawing, butterfly, rollover, etc to get a general overview.
- Summarize the facts.
- Identify the relevant sections in the Income Tax Act (ITA) which relate to shares such as ITA Sections 51, 55, 84, 85, 86, 88, etc.
ITA Section 51(1) - Share conversion
ITA Section 55(2) Dividend received as part of a transaction, event, or series of events with the intent to reduce a capital gains.
ITA Section 84 subsection 15(3) - Deemed dividends
**ITA Section 85 and 85(1) ** - Share for share exchange
ITA Section 86 - Exchange of shares in the course of a reorganization of capital
Section 88(1) Dissolution of a corporation. Windup