Words and Phrases - "contributed surplus"

Xco, a taxable Canadian corporation and private corporation, reduced its stated capital account and its paid-up capital in respect of a class of shares without making a distribution, at a time that it had an accumulated deficit. It now proposes to pass a resolution transferring its contributed surplus account to its stated capital account for corporate law purposes and to its paid-up capital in respect of the shares for income tax purposes. Xco continues to have an accumulated deficit that exceeds its contributed surplus account. CCRA stated:

[T]he meaning of "contributed surplus" should be based on its meaning under generally accepted accounting principles.

We cannot confirm that a company can, in accordance with generally accepted accounting principles, create "contributed surplus" as a consequence of the reduction in stated capital at a time when it also has an accumulated deficit. If the reduction in stated capital was, in accordance with generally accepted accounting principles, credited against the accumulated deficit for accounting purposes, contributed surplus was not created and any subsequent transfer of amounts from accumulated deficit into stated capital will not fall within the ambit of paragraph 84(1)(c.3) of the Act. The fact that the corporation no longer has an accumulated deficit at the time of the conversion should not have any impact on the applicability of paragraph 84(1)(c.3) of the Act. The issue to be determined is whether contributed surplus was created at the time of the reduction in stated capital.