The stated capital is the amount a corporation receives in exchange for issuing shares to shareholders.
In this article, I will break down the notion of Stated Capital so you know all there is to know about it!
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What Is Stated Capital
In Canada, stated capital refers to the amount of consideration a corporation receives in exchange for issuing shares.
A corporation’s share capital will be composed of elements that are authorized under their applicable corporate laws.
When par values are authorized, the stated capital of a class of shares will be its aggregate par value.
In the province of Quebec, along with other provinces such as BC, Nova Scotia, PEI, and New Brunswick, par value shares are permitted to be issued.
In essence, the par value of a stock represents the minimum consideration that must be paid to purchase the shares.
Typically, the par value of shares will be a very low figure.
Stated Capital Adjustments
Under the Canada Business Corporations Act (CBCA), a corporation is required to maintain a separate stated capital account for each class of shares in its share capital.
A corporation’s stated capital account will include the amount of cash consideration the corporation has received when issuing shares in the primary market.
All shares in the same class or series will have the same stated capital amount on a per-share basis.
A corporation’s stated account can be increased or decreased in different situations.
For instance, when the corporation buys back or redeems its shares, the stated capital account can be increased or decreased depending on the buyback value.
Also, the corporation’s board of directors can increase or decrease the stated capital by resolution of the board that must follow the CBCA or provincial rules.
According to Article 39(1) of the Canada Business Corporation Act, when there is a purchase, redemption, or other acquisition, “the corporation shall deduct from the stated capital account maintained for the class or series of shares of which the shares purchased, redeemed or otherwise acquired form a part an amount equal to the result obtained by multiplying the stated capital of the shares of that class or series by the number of shares of that class or series or fractions thereof purchased, redeemed or otherwise acquired, divided by the number of issued shares of that class or series immediately before the purchase, redemption or other acquisition.”
This provides the legal framework for the adjusted for the stated capital account under the CBCA.
Stated Capital And Contributed Surplus
In Canada, the contributed surplus is an accounting term that refers to the price recorded by a corporation for the sale of shares above its par value.
Whenever stocks are sold over and above their par value, the corporation will record an entry in two accounts, the par value account and the contributed surplus.
The par value account will show an amount equal to the par value of the shares multiplied by the number of shares sold.
The contributed surplus will show the amount that the shares were sold over and above the par value.
For example, if the company sells 1,000 shares at $10 per share having a par value of $1, it will record $1,000 on its balance sheet for its common stock and $9,000 as contributed surplus.
Stated Capital vs Paid up Capital
What is the difference between stated capital and paid up capital?
A stated capital account is a notional account a corporation must maintain for each class of shares it issues as per the applicable corporate law requirements in Canada.
For example, if a corporation sells 1,000 shares for $1,000 to a shareholder, it will record $1,000 in the stated capital account.
On the other hand, paid up capital is the actual amount that was paid by a shareholder.
Generally, the paid up capital can be returned back to the shareholder on a non-taxable basis.
The stated capital account holds the corporation’s paid up capital.
So there you have it folks!
What is stated capital?
In a nutshell, stated capital is the aggregate par value of all shares issued by a corporation.
The stated capital is the same for all the shares of the same class or series.
During the life of the corporation, the stated capital account can be adjusted upwards or downwards in different types of transactions.
If you are in a company looking to issue shares or you’re looking to purchase shares, it’s best that you consult a qualified corporate attorney to understand the legal ramifications of the transaction.
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