Yep. Given that this is a (self-described) “startup”, a “benefit” probably doesn’t exist and there is an interesting legal question as to whether a benefit CAN being conferred on someone by providing an artifically low purchase price on shares…especially when there is no existential proof of an exchange of equally artificially low priced work being provided for same. Typically these are written arrangements and result in provision of options., which may or may not be exercised.
It’s an interesting situation, but I still think it’s mostly a civil one (especially in a private company where the Sec Comm is unlikely to be involved).
Curious though…would be interested in knowing how this resolves.
Well, the cash paid by the investors, becomes property of the company, and diluting the shares, essentially sharing the cash with all other shareholders already, that’s something that can be measured based on % of shares
" (especially in a private company where the Sec Comm is unlikely to be involved)."
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Oh my. @SmallBizGuy - I think you are greatly under-estimating the incredibly broad scope, and incredibly deep depth that the BCSC reaches into…
I know I was extremely surprised at how broadly they define and what they consider to be governed by them. They are hugely involved in such “private company” situations, as soon as even one outside “investor” is involved and maybe becomes upset about something…
… And they levy millions of dollars in fines and penalties…
Are you saying that would be a benefit conferred on a shareholder??? I can’t agree with that. If I buy shares in a private company, those shares have no active trading value. Even if there was a legitimate valuation performed to establish the value of the company, that doesn’t force the company (i.e. the directors) to price the shares as a percentage of that valuation. They can decide the sell the shares for whatever price they want. There is no benefit conferred on ME. The EPS dilution occurred as a result of the company ISSUING new shares, not as a result of the price I paid for them.
Yes, the existing shareholders could be upset, but assuming those shareholders elected the directors who made the decision, what recourse do they have? They could remove those directors, elect a new board, and cancel the deal to sell me shares. I can’t imagine such a major decision to have been made without consulting the existing major shareholders/investors.
24.10.5 Sale of property by a corporation to a shareholder
General comments
A corporation confers a benefit on a shareholder when it sells capital property to the shareholder for less than its FMV. The value of the benefit is any excess of the FMV of the property over the selling price. The benefit is usually taxable in the year the sale takes place.
The FMV of the property is determined as of the date the transaction takes place. Depending on the nature of the property, refer valuation questions to Real Estate Appraisal or Business Equity Valuation, as necessary.
Go to 24.10.6, if the property sold comes from the corporation’s inventory.
Income tax implications - Shareholder
When the shareholder acquires capital property from a corporation for an amount less than the FMV, the auditor must consider the following tax implications:
a benefit pursuant to subsection 15(1);
an adjustment to the adjusted cost base (ACB) of the property the shareholder acquired;
an adjustment to the capital cost of the property acquired by the shareholder.
This may not be completely relevant, but even employee stock options will have benefit consideration
BILL C-84; S.C. 1986, C. 6, S. 2(1)
Subsection 7(1.1) of the Act contains the special rules for stock options of Canadian-controlled private corporations. Under this provision where an arm’s length employee of such a corporation receives an option to acquire its shares or those of a related corporation and acquires shares under that option, the benefit is taxed as a capital gain rather than as employment income provided that he holds the shares for two years. The amendment, which applies to shares acquired after May 22, 1985, provides that the full benefit is to be included in income in the year the share is disposed of or exchanged. However under new paragraph 110(1)(d.1) a taxpayer who holds the shares for at least two years will be entitled to a deduction equal to one half the amount included in income. These amendments are consequential on the introduction of the new capital gains exemption and ensure that one-half the difference between the fair market value of the share at the time of its acquisition and the option price will be subject to taxation. This preserves the current one-half taxation of employee stock option benefits. Any gain accruing on the share after it is acquired by the employee will be subject to the capital gains rules.
The audit manual reference is with respect to transfer of capital property to a shareholder. That is a totally different fact situation than what was presented.
You can’t give that Kubota worth $50,000 to a shareholder for $10.
So I got the share register from the lawyer. The discounted shares were actually issued about three months prior to the share offering @ $10/share. At the time of the discount shares being issued the consensus was the company was worth zero. (sitting on a retained deficit of $500K).
So then the fundraising round of share issuance come around. The founder goes into the proverbial dragon’s den and says “My company is so awesome it’s worth $1,500,000.” And O’Leary says “I’ll give you $500K but I want 75% of the company”. The Dragons do their due diligence and they know of the discounted shares etc. and are satisfied and hand over the money. That is essentially what happened.
So, did you figure out an answer to your question? Or are you still wondering how to record the share issuance?
Regardless, now I’m curious. If the shares were
who were they initially issued TO?
Are you saying the company sold shares for $10/share to “somebody” and then 3 months later that “somebody” sold their shares to “the Dragons” for 10¢/share?