Shareholder benefit

I have a new client, incorporated a new company for common share with nominal value, then brings in few investors for $1/shares, on the same class of common shares, which is 100 times what he subscribed for.

I think there should be a benefit conferred, but not sure if section 15 applies or if there is another provisions that can be looked at. The issue is, the shares are issued for cash considerations, this is a new company, so there is no really valuation to be done, but the difference in pricing would suggest something intangible, I was told, the founder would be responsible for the set up of the company and planning etc… That’s why.

I thought about having goodwill and increase the PUC, but since this was done and incorporated legally already, the only way, I think will be a deemed benefit ?

Appreciate any reference on this matter.


The PUC of the class of common shares is averaged out. He has realized a benefit and the others have incurred a loss but I don’t think there’s a current tax issue for anyone. I assume the new shareholders acquired their shares from treasury. I see your logic but no one has disposed of anything so the gain or losses shouldn’t be realized.

As an edit, he may never realize this “benefit” if he sells his shares to someone other than the company.

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That’s what my initial thought was, we maybe looking at potential deemed dividend issue down the road with return of PUC, but the timing of the share subscriptions, concerns me, the company was incorporated for 0.01/share, but then the next day, same class of share issued for $1/share.

If those shares were issued at the same time, I don’t see how that’s possible,

Assuming the shareholders are not related and no one was compelled to buy shares, that is the definition of “fair market value”. There could be many reasons why the new shareholders were willing to pay so much more for their shares. CRA may be concerned if the PUC migration was significant and original shareholder sold his shares back to the company shortly after the investment by the new shareholders, thereby realizing a sizable benefit.

FMV is exactly the reason I am concerning about it, well, cash value is FMV, but the share value, without any property and business activities, I don’t how 1 share can worth 0.01 to A, but $1 to B. But I can’t find any provision to deal with this kind of issue to tell them the potential tax consequence.

The only thing I can think of maybe, the disparity in share pricing, potentially deems all shareholders are dealing at non-arm’s length, and section 69 applies

I don’t think there are any tax consequences.

Many of these meme stock, pot stock and tech start ups were literally bringing in millions by selling shares to the public before they had any assets or even a single dollar of revenue. Maybe your client sold shares to his investors based on a business model or sales pitch their ground floor investment would be quite valuable at some future date. Maybe they decided his vision for the company was worth risking a dollar per share investment.


The only cause for concern that I had was, this is a newly incorporated business, and the only legal contract or resolution is the issuance of shares, which indicates, all shares are issued and sold at the same time. I don’t see how you can have 2 different FMV for the same class of shares at the same time. And without explanation of why there is such disparity in pricing in the resolution,

I was reading IT456-R, Paragraph 6,
Where treasury shares are acquired from a corporation in a non-arm’s length transaction at a price that is greater than their fair market value, the cost of the shares is reduced under paragraph 69(1)(a) to that fair market value. The difference between the price paid for the shares and their fair market value is considered to be a contribution of capital for the purpose of paragraph 53(1)(c) provided the contribution results in some increase in the value of all the shares of the corporation owned by the shareholder.

This seems to suggest that in a non-arm’s length situation, depending on what the FMV is, if $0.01 is the FMV of the treasure share, then all investors’ shares which acquired at $1/share, will be reduced to the $0.01 being the FMV, with the $1 still being considered as contribution of capital.

On the other hand, if the FMV is $1, then the shareholder with acquisition price of $0.01/share, will have a taxable benefit.

The difference in share price seems to substantiate that shareholders have their own interest, so under Income Tax folio S1-F5-C1, they maybe dealing at non-arm’s length even though they are not related.

Elon has his lawyer incorporate Reacto Inc; a CCPC and issues himself 100 shares for 10 cents. He then jumps onto his social media account and tweets to the world that he has invented a prototype for a personal compact fusion reactor… a shoe box sized energy source with the ability to power your home and automobiles for about 25 years without the need for refuelling or recharging. In an effort to raise capital for Reacto Inc Elon solicits some private Canadian investors… with the opportunity to buy in at the ground level for $1.00 per share.

I’m still not sure the CRA would consider Elon to have a taxable benefit.

Perhaps the FMV of the shares increased after the issuance of Elon’s shares due to the perceived value of the corporate management team.



where is the guy flogging his dead donkey when we need him?

At least, you have an idea out there that people can see on social media, etc., valuation of the idea is another thing, but when there is nothing, except a promise that it’s going to be a profitable company, a replica of an existing one

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How do you know it’s worth only 1¢ to A? He might feel that his shares are worth $100/share, and happy that he got them for only 1¢/share. Or in this case, he may feel that he created the increase in value, and he deserves 1000% return. What the shares are worth is subjective.

And, it doesn’t matter for tax purposes, because he hasn’t sold the shares. If he “redeems” the shares (back to the corporation) for $1/share (i.e. FMV established by sale to arms-length person), then he will pay tax on a deemed dividend per ITA 84(3). If he sells the shares to some other person, then he will pay tax on any capital gain (proceeds less ACB). There is no way he can benefit without paying tax, so there is no shareholder benefit.

There is, of course, a risk that B may get angry when he finds out his share value has been diluted. But there is no tax consequence resulting from B getting angry at A. :grin: :wink:

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If the other shareholders will be angry, then does it not suggest that it’s not a bona fide transaction that it’s questionable?

People can be angry for many reasons; by itself, it’s not an indication of them having been taken advantage of. It could be an indication that they are financially uneducated. As has been said already, the original shareholder may never even get the benefit of the PUC averaging. The scale of the PUC averaging depends on how many shares the original shareholder subscribed for and how many shares the other shareholders were issued. Is there really a significant dollar amount involved? If they feel there is an injustice here then they should pursue some avenue to cure it. I don’t think anyone here can state that something is wrong without the full story.