Equity & Capital Glossary
Plain-English definitions for the key terms you'll encounter when working with equity and capital in your Canadian corporation.
Adjusted Cost Base (ACB)
The total cost of an investment for tax purposes, including the original purchase price and any subsequent adjustments. Used to calculate capital gains when shares are sold. The ACB of your shares in your corporation starts with the paid-in capital and may be adjusted over time.
Capital Contribution
Money or assets put into a business by an owner or shareholder to fund operations or growth. Increases equity. Not revenue, not a loan (unless structured as one). For corporations, usually recorded as share capital or a shareholder loan credit.
Deemed Dividend
An amount that the CRA treats as a dividend even though it wasn't formally declared as one. Arises in situations like share repurchases, certain shareholder loan transactions, or wind-up distributions. Subject to personal income tax.
Equity
The owners' residual interest in the business — what's left after all liabilities are subtracted from all assets. Equity = Assets minus Liabilities. Increases with profits and contributions; decreases with losses and distributions.
Owner's Capital
For sole proprietors — the equity account that tracks the net of all money put in (capital contributions), money taken out (drawings), and accumulated profit. The equivalent of a corporation's combined share capital and retained earnings.
Owner's Drawings
For sole proprietors — amounts withdrawn from the business for personal use. Not a business expense and not taxable at the time of withdrawal (the proprietor already pays tax on business profit). Reduces equity.
Paid-In Capital (Share Capital / Stated Capital)
The total amount shareholders have invested in a corporation in exchange for shares. A permanent equity account — it only changes when new shares are issued or existing shares are repurchased. Not affected by profits or losses.
Retained Earnings
Cumulative corporate profit that has not been distributed as dividends. Increases with profitable years, decreases with losses and dividends. Represents the value the business has built and reinvested since inception.
Share Buyback (Share Repurchase)
When a corporation buys back its own shares from a shareholder. Reduces paid-in capital and requires corporate formalities. Has specific tax implications for the departing shareholder — a portion of the repurchase price may be treated as a deemed dividend.
Shareholder's Equity
The equity section of a corporation's Balance Sheet. Includes paid-in capital, retained earnings, and any other equity components (e.g., contributed surplus). Represents what shareholders would theoretically receive if all assets were sold and all liabilities paid.
Surplus
Generally refers to retained earnings that exceed what was originally invested. A business with strong surplus has consistently earned more than it distributed — it's accumulated value.
Wind-Up
The formal process of closing a corporation. Assets are sold or distributed, liabilities are settled, and remaining equity is returned to shareholders. The distribution of remaining equity may trigger deemed dividends and capital gains at the personal level — a significant tax planning event requiring Mesa CPA advisor guidance.