When shares are redeemed, there is a taxable deemed dividend. The deemed dividend per share is calculated as the difference between the Redemption Price per share and the Paid Up Capital (PUC) per share.
There will be capital gains when shares are redeemed with PUC greater than Adjusted Cost Base (ACB).
Capital gain is calculated as follows:
Adjusted Proceed – ACB = Capital gain
Adjusted Proceed is calculated by:
Redemption Value – Deemed Dividend = Adjusted Proceed
For example, for Investor X (assuming his ACB is $14.50)
The deemed dividend is $7.14.
The adjusted proceed is $27 – 7.14 = $19.86.
The capital gain is $19.86 – 14.5 = $5.36 per share.
The total that is taxed is $7.14+$5.36= $12.50 which is the gain based on the ACB except that this gain isn’t taxed at the capital gains rate – it’s taxed partly as a cap gain and partly as a dividend. However, WUTIF can, from time to time, transfer some of its Capital Dividend Account (CDA) to investors, eliminating the deemed dividend (and tax thereon) entirely! In this case the Investor in the above example would be cap gains tax on just $5.36.