Q: Which of the following is the correct formula for calculating the Paid-Up Capital (PUC) per share for a class of shares?

$$\frac{\text{Total capital contributed for the class}}{\text{Total number of shares outstanding in the class}}$$

Question 1

Which of the following statements best describes the difference between Adjusted Cost Base (ACB) and Paid-Up Capital (PUC) for shares in a Canadian corporation?

Accepted Answer

ACB is based on the amount paid for the shares by each shareholder and is unique to each shareholder, while PUC is calculated at the corporate level and averaged across all shares of a class.

Question 2

A shareholder purchases 100 shares of a corporation from another shareholder for $20 per share. What is the Adjusted Cost Base (ACB) of these shares to the purchaser?

Accepted Answer

$2,000, because ACB equals the amount paid to acquire the shares.

Question 3

Which section of the Income Tax Act (ITA) provides the definition of Adjusted Cost Base (ACB) that applies throughout the Act?

Accepted Answer

Section 248(1), which references the section 54 definition and applies throughout the Act.

Question 4

Suppose a corporation issues 200 Class A shares at $$5 per share to Shareholder X, and later issues 250 more Class A shares at 14 $$per share to Shareholder Y. What is the Paid-Up Capital (PUC) per Class A share after both issuances?

Accepted Answer

$10

Question 5

Which of the following is NOT a characteristic used to determine the Fair Market Value (FMV) of a particular share or class of shares?

Accepted Answer

The Adjusted Cost Base (ACB) of the shares

Question 6

A company reduces the PUC of a class of shares and pays out an amount greater than the PUC reduction. According to subsection 84(4) of the ITA, what is the tax consequence for shareholders?

Accepted Answer

Shareholders are deemed to receive a dividend equal to the excess amount over the PUC reduction.

Question 7

Which of the following best describes why S 53 adjustments are generally not made to the ACB of depreciable capital property?

Accepted Answer

To preserve the integrity of the Capital Cost Allowance (CCA) system and avoid fluctuations in value after the property is classified.

Question 8

If a shareholder receives a deemed dividend under subsection 84(1) due to an artificial increase in PUC, what happens to the ACB of the shares that received the deemed dividend?

Accepted Answer

The ACB of the shares is increased by the amount of the deemed dividend.

Question 9

Which of the following is the correct formula for calculating the Paid-Up Capital (PUC) per share for a class of shares?

Accepted Answer

$$\frac{	ext{Total capital contributed for the class}}{	ext{Total number of shares outstanding in the class}}$$

Question 10

A shareholder receives a return of capital that is not a deemed dividend. According to the ITA, what is the effect on the shareholder's ACB?

Accepted Answer

The ACB is reduced by the amount of the return of capital.

Question 11

Which of the following best describes the definition of Fair Market Value (FMV) as per CRA’s IC-89-3 policy statement?

Accepted Answer

FMV is the highest price obtainable in an open and unrestricted market between knowledgeable, informed, and prudent parties acting at arm's length, neither party being under compulsion to transact.

Question 12

If a shareholder acquires shares via a stock dividend, which section of the ITA provides guidance on how to compute the 'cost' of those shares for ACB purposes?

Accepted Answer

Section 52(3)(a)

Question 13

Which of the following is TRUE regarding the relationship between PUC and ACB for a shareholder?

Accepted Answer

A shareholder's PUC is based on a corporate-level calculation and may differ from their ACB, which is based on what they paid for the shares.

Question 14

A company issues new shares of an existing class to a new shareholder at a higher price than previous issuances. What is the impact on the PUC per share for that class?

Accepted Answer

The PUC per share for that class increases, as total capital contributed is averaged over all outstanding shares.

Question 15

Which of the following is a key reason why the Canada Revenue Agency (CRA) is concerned with accurate Fair Market Value (FMV) determinations in non-arm’s length transactions?

Accepted Answer

Because NAL parties may transact at less or more than FMV, leading to insufficient income taxes being paid.

Question 16

Which of the following is NOT an exception to the deemed dividend rule under subsection 84(1) of the ITA?

Accepted Answer

A cash dividend paid out of retained earnings

Question 17

A shareholder’s ACB for a class of shares is $$5,000. The corporation returns 2$$,000 of PUC to the shareholder, and $500 of this amount is deemed a dividend under S 84(4). What is the shareholder’s new ACB?

Accepted Answer

$3,500

Question 18

Which of the following statements about the calculation of ACB for shares is correct?

Accepted Answer

ACB is unique to each shareholder and is based on the amount paid for their shares, with adjustments as required by S 53(1) and S 53(2).

Question 19

Which of the following formulas correctly represents the calculation of capital gain or loss on the disposition of a capital property?

Accepted Answer

$$	ext{Capital Gain/Loss} = 	ext{Proceeds of Disposition} - 	ext{Adjusted Cost Base} - 	ext{Expenses of Disposition}$$

Key Tax Attributes in Canadian Corporate Taxation: ACB, PUC, FMV, and Deemed Dividends

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