Tax Aspects of Equity

• Author: Vern Krishna
• Pages: 227-234

Chapter X: Tax Aspects of Equity 227

Chapter X: Tax Aspects of Equity

A. GENERAL COMMENT

A corporation’s share capital represents its permanent capital base

and is a key component of equity, the denominator in calculating

return on equity (ROE). A corporation is generally not obliged to

re-purchase its shares and return capital to shareholders. Since, in

most cases, the payment of dividends is within the discretion of the

board of directors, a corporation need not pay dividends when it

is not nancially secure. Indeed, as we have seen, a corporation is

prohibited from paying dividends if the payment would impair its

nancial ability to repay its debts as they become due.

One measures a shareholder’s ownership of a corporation by

the number of shares that he or she owns. For tax purposes, the

paid-up capital (PUC) of a share represents the owner’s capital in-

terest in the corporation for tax purposes.

Two fundamental tax aspects of corporate share capital inu-

ence a corporation’s tax structure:

) Dividends are paid from aer-tax dollars and are not deduct-

ible from income; and

) e paid-up capital of shares can be returned to shareholders

on a tax-free basis.

us, these two features play an important role in determining

the overall debt/equity ratio and corporate leverage.