Paid-Up Capital vs Stated Capital vs Retained Earnings
Quick answer: Paid-up capital (PUC) is the amount shareholders have actually paid for their shares. Stated capital is the corporate law concept (Canadian CBCA term). Retained earnings are accumulated profits not distributed as dividends.
Paid-Up Capital (PUC) vs Stated Capital
In Canada, the Canada Business Corporations Act (CBCA) uses the term stated capital to describe the total of all amounts received by a corporation for the issuance of its shares. Under the CBCA, "stated capital" is essentially the same as what is commonly called paid-up capital (PUC) in common parlance — the actual dollar amount contributed by shareholders.
Key rules:
- Stated capital cannot be reduced by dividends paid to shareholders (except in specific circumstances)
- When shares are issued at a premium, the excess above the per-share stated value goes to the contributed surplus account (not stated capital)
- Stock splits do not change stated capital — only the number of shares outstanding
Example: Journal Entries
A corporation issues 1,000 common shares at $10/share (stated capital = $1/share):
Dr Cash $10,000
Cr Common Shares $1,000
Cr Contributed Surplus $9,000
In this case, stated capital (common shares) = $1,000; contributed surplus = $9,000.
When the corporation later pays a dividend, the reduction is from retained earnings (not from stated capital), unless the dividend is a stock dividend (which transfers from retained earnings to stated capital).
Key Differences
| Stated Capital / PUC | Retained Earnings | |
|---|---|---|
| Source | Shareholder contributions (equity raises) | Accumulated profits (not paid out) |
| Can be reduced by dividends? | Generally no (CBCA rule) | Yes, when dividends declared |
| Represents | Capital invested | Capital earned |
| Tax on return | Return of capital usually tax-free | Dividends taxable to shareholders |
Dividend Treatment and Implications
When a corporation pays a dividend from retained earnings, the entire amount is taxable to the Canadian shareholder as a dividend. However, if the dividend is paid from the Capital Dividend Account (CDA), it can be received tax-free.
The key link between stated capital and dividends: when shares are issued at a premium, the excess over stated value goes to contributed surplus — and this excess may flow through the CDA as a tax-free return of capital.
