How is a share redemption taxed under section 84(3), and when do 84(1) and 84(2) deem a dividend?
A section 84 deemed dividend is the part of a payment that exceeds paid up capital. On a share redemption, 84(3) treats the amount paid above the shares' PUC as a dividend, and only the PUC is proceeds of disposition. Section 84(1) catches a PUC increase with no matching new assets, and 84(2) a wind up distribution above PUC.
Which section 84 rule creates the dividend, and how big is it?
Each subsection targets a different way money or value leaves the corporation without a declared dividend, and each one measures the dividend against paid up capital (PUC) laws-lois.justice.gc.ca. PUC is a tax figure: section 89(1) computes it for a class without reference to the Act's own provisions, other than the adjustments it lists, and divides it evenly across the shares of that class
laws-lois.justice.gc.ca.
| Subsection | What triggers it | Deemed dividend | Shareholder side |
|---|---|---|---|
| 84(1) | Resident corporation increases the PUC of a class | The PUC increase, minus any increase in net assets (or decrease in liabilities) and any PUC decrease on other classes; stock dividends excluded | Individual adds it to ACB, 53(1)(b) |
| 84(2) | Funds or property distributed on a wind up, discontinuance or reorganization of the business | Value distributed minus the reduction in PUC of the class | Removed from proceeds, 54(j) |
| 84(3) | Corporation redeems, acquires or cancels its own shares (other than under 84(2)) | Amount paid minus the PUC of those shares immediately before | Removed from proceeds, 54(j); disposition deemed by 84(9) |
| 84(4) | PUC reduced other than by a redemption, acquisition or cancellation | Amount paid minus the PUC reduction | The PUC part reduces ACB, 53(2)(a)(ii) |
| 84(4.1) | Public corporation pays on a PUC reduction | The amount paid, unless it comes from certain disposition proceeds outside the ordinary course in the prior 24 months | Same as 84(4) |
Three exceptions carve out most of the surprises. Subsection 84(6)(a) switches off 84(2) and 84(3) to the extent 84(1) already applies, and 84(6)(b) switches them off for a corporation buying its own shares in the open market the way any member of the public would. Subsection 84(8) stops 84(3) for an arm's length individual resident in Canada whose prescribed shares of a public corporation are redeemed laws-lois.justice.gc.ca.
Two timing rules matter for the paperwork. A dividend deemed by section 84 or 84.1 is deemed to have become payable at the time it's paid (84(7)), and the 84(3) dividend is deemed paid on a separate class made up of the redeemed shares, received by each holder in proportion to their holding laws-lois.justice.gc.ca. When the corporation pays with its own shares, 84(5) values them at the PUC increase from their issue, not at fair market value.
How is a share redemption taxed under section 84(3)?
In two pieces. The amount paid above PUC is a dividend under 84(3), and the shareholder is deemed to have disposed of the shares to the corporation under 84(9) laws-lois.justice.gc.ca. Paragraph (j) of the proceeds definition then takes the deemed dividend out of proceeds of disposition, so the proceeds left are usually just the PUC
laws-lois.justice.gc.ca. Compare those proceeds with the ACB, and the capital gain or loss falls out.
Worked example: Opco redeems your client's 1,000 Class A shares for $400,000. The PUC of those shares is $1,000. Here is the same redemption with three different histories behind the shares.
| Line | A: founder's shares | B: shares bought for $250,000 | C: as B, client still controls Opco |
|---|---|---|---|
| Amount paid | $400,000 | $400,000 | $400,000 |
| PUC of the redeemed shares | $1,000 | $1,000 | $1,000 |
| Deemed dividend, 84(3) | $399,000 | $399,000 | $399,000 |
| Proceeds of disposition, 54(j) | $1,000 | $1,000 | $1,000 |
| ACB | $1,000 | $250,000 | $250,000 |
| Capital gain (loss) | $0 | ($249,000) | ($249,000) |
| Allowable capital loss at one half | $0 | $124,500 | $0, loss deemed nil by 40(3.6) |
| Where the loss goes | n/a | Against taxable capital gains | Added to ACB of the Opco shares your client keeps |
Case B is the common one when your client bought out a partner at fair market value: the price paid sits in ACB, but PUC stayed at the original subscription. The allowable capital loss is one half of the loss under paragraph 38(b) laws-lois.justice.gc.ca, and the 50% rate still holds for 2026 (see capital gains inclusion rate 2026).
The $399,000 is taxed as a dividend. If Opco pays it as non eligible, the grossed up taxable amount is $458,850 (115%); if Opco designates it eligible, it's $550,620 (138%), from the gross ups in 82(1)(b) laws-lois.justice.gc.ca. The credits that go with each are on the dividend gross up 2026 page.
When the shareholder is a corporation, the redemption dividend can run into section 55(2). If it applies, paragraph (j) stops excluding the dividend from proceeds, because 55(2)(b) deems it to be proceeds of disposition laws-lois.justice.gc.ca. A redemption dividend faces the result test there, not just a purpose test; the safe income mechanics are on section 55(2) safe income.
When is the capital loss on a redemption denied or reduced?
Subsection 40(3.6) deems the loss nil when a taxpayer disposes of a share to a corporation it's affiliated with immediately after the disposition. The denied loss isn't gone: it's added to the ACB of the shares of that corporation the taxpayer still owns, in proportion to their fair market value laws-lois.justice.gc.ca. An individual is affiliated with a corporation they control, with one controlled by an affiliated group they belong to, and with one their spouse controls
laws-lois.justice.gc.ca. That's case C above: redeem part of a controlling shareholder's shares and the loss moves into the remaining shares.
The stop loss rules in 112(3) cut the loss a second way. For an individual, the loss on a capital property share is reduced by capital dividends received on it, capped at the loss minus taxable dividends received on the share. For a corporation, the reduction covers taxable dividends on the share it deducted under 112(1), which can include the 84(3) dividend from the redemption itself, plus capital dividends laws-lois.justice.gc.ca.
Subsection 112(3.01) leaves a dividend out of that reduction when your client shows that, at the time it was received, your client and non arm's length persons held no more than 5% of any class of the corporation's shares, and that your client owned the share for the 365 days before the disposition laws-lois.justice.gc.ca. Owner managers rarely pass the 5% test.
A private corporation can elect under 83(2) to pay the redemption dividend as a capital dividend, because 84(7) makes it payable when paid laws-lois.justice.gc.ca. The election covers the whole dividend, and only the CDA balance immediately before it is tax free. Elect more than the balance and Part III tax applies to the excess; the fix is on the capital dividend account page.
When does a PUC change trigger 84(1) or 84(4)?
Section 84(1) bites when PUC goes up without value coming in. Say Opco's directors add $50,000 of retained earnings to the stated capital of the common shares, owned 60% by one shareholder and 40% by another. Nothing came into the corporation, so 84(1) deems a $50,000 dividend received in proportion to holdings: $30,000 and $20,000 laws-lois.justice.gc.ca. An individual adds that deemed dividend to the ACB of the shares under 53(1)(b), so it isn't taxed again on a later sale
laws-lois.justice.gc.ca.
Section 84(4) works the other way. If Opco reduces the PUC of a class by $40,000 and pays out $40,000, there's no dividend, and the $40,000 comes off each shareholder's ACB under 53(2)(a)(ii) laws-lois.justice.gc.ca. Pay $60,000 on the same $40,000 reduction and $20,000 is a deemed dividend
laws-lois.justice.gc.ca. Watch shares bought cheaply but carrying high PUC: the return can exceed ACB, and what happens to a negative ACB is on adjusted cost base.
Stated capital and PUC can drift apart. A section 85 rollover grinds the PUC of the new shares by (A minus B) × C/A, which leaves the PUC added at the transferee's cost of the property minus boot when only one class is issued laws-lois.justice.gc.ca. Section 84.1 runs the same style of grind on a sale to a related corporation
laws-lois.justice.gc.ca. So the stated capital in the minute book can overstate what comes back tax free. Check the PUC history before you plan a return of capital or a redemption; the mechanics are on section 84.1 and section 85 rollover.
There's a partial fix built in. When a later redemption or PUC reduction produces a bigger 84(3), 84(4) or 84(4.1) dividend because of the grind, 85(2.1)(b) adds that amount back to PUC, capped at the earlier reduction laws-lois.justice.gc.ca.
What does 84(2) do on a wind up?
On a wind up, discontinuance or reorganization of the business, 84(2) deems a dividend equal to the funds or property distributed to shareholders, minus the reduction in PUC of the class on that distribution laws-lois.justice.gc.ca. Shares of the corporation handed out in the distribution are valued at their PUC under 84(5). As with a redemption, paragraph (j) takes the deemed dividend out of each shareholder's proceeds of disposition
laws-lois.justice.gc.ca.
When a Canadian corporation outside 88(1) winds up and substantially all its property goes to shareholders, 88(2) splits the 84(2) dividend into separate dividends: first a capital dividend up to the CDA if the corporation elects under 83(2), then a portion equal to its capital surplus on hand from before 1972 that is not a dividend at all, and the rest a taxable dividend, each shared in proportion to holdings laws-lois.justice.gc.ca.
A section 88(1) wind up of a subsidiary into its parent is different: 88(1)(d.1) says 84(2) doesn't apply, so there's no deemed dividend laws-lois.justice.gc.ca. The rollover and bump are on section 88 wind up.
How do you report and designate a section 84 deemed dividend?
On a T5. The CRA requires a T5 slip for dividends, "including most deemed dividends", and for a redemption it says to include the full amount paid and deduct the PUC of the shares canada.ca. Box 10 takes non eligible deemed dividends and box 24 eligible ones, with the taxable amounts in boxes 11 and 25 for an individual. The slip is due by the last day of February after the calendar year, and no slip is needed when the total paid to a recipient in the year is under $50
canada.ca. Deadlines and penalties are on T5 slip deadline.
A deemed dividend is a taxable dividend, so the corporation can designate it eligible under 89(14) by notifying each recipient in writing at the time it's paid, and a late designation is possible within three years where the Minister considers it just and equitable laws-lois.justice.gc.ca. The CRA accepts letters to shareholders, dividend cheque stubs, or a notation in the minutes when every shareholder is a director
canada.ca. Put the designation in the redemption resolution so it exists on the day the shares are redeemed. How much can go out eligible depends on GRIP; see eligible dividend designation and GRIP.
Sources
Does 84(3) apply when a public company buys back shares on the stock exchange?
No. Subsection 84(6)(b) excludes a corporation's purchase of its own shares in the open market, bought the way any member of the public would buy them laws-lois.justice.gc.ca. The selling shareholder has an ordinary disposition, with a capital gain or loss on the full price.
Is a redemption from a holding company still a dividend if 55(2) does not apply?
Yes. The 84(3) amount is a taxable dividend that the corporate shareholder can usually deduct under 112(1); see intercorporate dividends. Keep in mind that the same dividend then reduces any loss on the redeemed shares under 112(3) laws-lois.justice.gc.ca.
How is 84(3) different from the 84.1 deemed dividend?
Section 84(3) applies when the corporation itself redeems or buys its shares; 84.1 applies when your client sells shares to a related corporation for boot above PUC and hard ACB. Both dividends come off proceeds, 84(3) through paragraph (j) and 84.1 through paragraph (k) of the proceeds definition laws-lois.justice.gc.ca. The 84.1 formulas are on section 84.1.
When is the redemption dividend received for tax purposes?
At the time the shares are redeemed, acquired or cancelled. Subsection 84(3)(b) deems each holder to receive it at that time, and 84(7) deems it payable then laws-lois.justice.gc.ca. A redemption paid with a promissory note still creates the dividend on the redemption date, not when the note is repaid.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.