Par value shares are often considered one of the last vestiges of the old Canadian corporate legislation. The current federal corporate legislation, and the majority of provincial corporate legislation, no longer permit the issuance of par value shares.
However, the corporate legislation in certain provinces (including British Columbia and Nova Scotia) still allow for the issuance of par value shares. It is not uncommon for companies in these jurisdictions to issue such shares. These companies, and their advisors, should have a general understanding of the rules applicable to par value shares, particularly as they relate to the paid‑up capital of those shares for tax purposes, since overlooking such rules may restrict planning opportunities or lead to unwanted tax implications.
What are par value shares?
Depending on its authorized share structure, a B.C. company may issue shares with a par value. Generally, the “par value” of a share is intended to track a shareholder’s investment in a company. There are no restrictions surrounding the amount selected as the par value, although a nominal amount ($0.01 or $1.00) is often used.
When a B.C. company issues shares with par value, an amount equal to the aggregate of the par value of the shares issued is added to the capital of the company for that class or series of shares.
Benefits and drawbacks
Determining the capital of a class or series
One of the advantages of issuing shares with par value is that it is often much easier to track the capital (for corporate purposes) and paid-up capital (for tax purposes) of a particular class or series of shares.
For example, if a B.C. company is authorized to issue Class A Shares with a par value of $1.00 per share, determining the capital of the Class A Shares is simply a matter of multiplying the number of shares issued and outstanding by $1.00. There is no need to review the company’s corporate records to determine the amount added to the capital of the Class A Shares on each issuance (as may be required if the Class A Shares did not have a par value).
Lack of flexibility and potential tax implications
The benefit discussed above may also be considered a drawback, since it restricts the amount that can be added to the capital of a class or series of shares. This limitation can be easy to overlook and may result in the directors of a B.C. company resolving to increase the capital of a class of shares with par value in excess of the amount permitted.
For example, assume a shareholder invests $10,000.00 into a B.C. company and receives 100 Class A Shares with a par value of $1.00 each. The directors may resolve, at the time of issuance, to increase the capital of the Class A Shares by $10,000.00 in order to track the amount of the investment. However, such an increase must equal the aggregate par value of the shares issued (being $100.00). The result is that the purported increase of $10,000.00 would be a contravention of the B.C. corporate legislation. The actual increase in the capital of the Class A Shares would be $100.00.
This mismatch ($10,000.00 investment, but only $100.00 capital increase) may also lead to unfavourable tax outcomes. Generally, a company can return the paid-up capital of a share to the holder of the share tax‑free. This is particularly important where the shareholder is an individual or a non-resident entity. The starting point for determining the paid-up capital of a share for tax purposes is its capital for corporate purposes.[1] Using the example above, if the B.C. company were to effect a reduction of capital of the Class A Shares, it could return a maximum of only $100.00 to the shareholder on a tax‑free basis.
This unfavourable result can be easily avoided with proper planning by an advisor familiar with the nuances of B.C. corporate law and its interaction with tax law.
Businesses and advisors beware
The discussion above is a general overview of some of the potential benefits and drawbacks of issuing par value shares. Although par value shares are no longer permitted in most Canadian jurisdictions, all businesses and advisors should have a general understanding of the applicable rules and how they interact with the calculation of paid-up capital for tax purposes.
If you have any questions about par value shares and related tax implications, please contact a member of the Miller Thomson LLP Corporate Tax Group.
[1] There are various provisions in the Income Tax Act (Canada) that may apply to alter the paid-up capital to an amount different than the capital for corporate purposes. For the purposes of this example, it is assumed that none of these provisions apply.
