Entrepreneurship & Small Business

Receiving Shares as Business Revenue

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  • Feb 10th, 2020 4:52 pm
[OP]
Newbie
Mar 16, 2017
43 posts
16 upvotes
Toronto

Receiving Shares as Business Revenue

We performed some services for another company. Instead of cash, we received some shares as the revenue from our services. However, the value of these shares has increased moderately during the past 3 months and I am not sure how to classify our earnings between regular active income vs capital gains.

My understanding is that the book value of these shares are considered as active income but the appreciation portion on the shares are considered as capital gain and should subject to taxes on capital gain, am I getting it right?

Additionally, the share ownership structure provides 4-5 people are owning this company, each with 20%-30% ownership on the common-voting class A shares. How could we transfer these shares out to our own personal (or corporate) accounts?

Many thanks in advance for your help and advice!
9 replies
Deal Guru
User avatar
Mar 23, 2008
10299 posts
6553 upvotes
Edmonton
If the shares aren't in a publicly traded company, how are you measuring their value? How were you planning on cashing them out when you agreed to take them?

C
[OP]
Newbie
Mar 16, 2017
43 posts
16 upvotes
Toronto
Yes it is a publicly traded company. If i decided to sell those shares, it will produce realized capital gain, but I am not sure if this is really capital gain and subject to capital gain taxes or still considered income (since it was "earned" and not "invested")

CNeufeld wrote: If the shares aren't in a publicly traded company, how are you measuring their value? How were you planning on cashing them out when you agreed to take them?

C
Jr. Member
Jan 18, 2017
162 posts
122 upvotes
There's three parts going on here:

Part 1: you did a barter transaction to receive the shares. The fair market value of the shares on the date of transfer is going to be what you show as business revenue. So if the shares were worth $100, you would Dr. Shares $100, Cr. Revenue $100;

Part 2: This depends on if you actually sold the shares or not. If you haven't sold them yet, then you don't have anything to worry about.

If you DID sell them, then you will have a capital gain on whatever the proceeds were above the original cost. So for example, say you sold the shares for $150. You would have a capital gain of $50. ($150 proceeds, less $100 cost basis, as calc'd in Part 1);

Part 3 If you haven't sold the shares, and want to transfer them out to the shareholders, it gets more complicated. Simplest way is just sell the shares, then dividend out the proceeds on a percentage basis. In keeping with our example, if you sell the shares for $150, dividend out $30 (20%) of the $150 to Shareholder 1, $30 to Shareholder 2, $30 to Shareholder 3, etc.

mazhanlv wrote: We performed some services for another company. Instead of cash, we received some shares as the revenue from our services. However, the value of these shares has increased moderately during the past 3 months and I am not sure how to classify our earnings between regular active income vs capital gains.

My understanding is that the book value of these shares are considered as active income but the appreciation portion on the shares are considered as capital gain and should subject to taxes on capital gain, am I getting it right?

Additionally, the share ownership structure provides 4-5 people are owning this company, each with 20%-30% ownership on the common-voting class A shares. How could we transfer these shares out to our own personal (or corporate) accounts?

Many thanks in advance for your help and advice!
______
Canadian & US tax guy
[OP]
Newbie
Mar 16, 2017
43 posts
16 upvotes
Toronto
Thanks a lot for the detailed explaination!

One question through - the number of shares along with the price was already set long ago and we put in those info in the contract, we signed the contract and performed the service at the publicly listed company. The share price has been increasing for the past 10 months hence we had a significant price difference between the price in the contract and the market price when the shares were actually transferred into our company's account. Should we still use FMV and not the share price in the contract to perform the service?

To illustrate, we signed a contract to perform the service in exchange for 4,000 shares at $22. When the shares were transferred over to our company, the price already had increased to $37. And now it's $45. Which price should we use to record this revenue? Is it $37 as you suggested?

Thank you again!

crossborderguy wrote: There's three parts going on here:

Part 1: you did a barter transaction to receive the shares. The fair market value of the shares on the date of transfer is going to be what you show as business revenue. So if the shares were worth $100, you would Dr. Shares $100, Cr. Revenue $100;

Part 2: This depends on if you actually sold the shares or not. If you haven't sold them yet, then you don't have anything to worry about.

If you DID sell them, then you will have a capital gain on whatever the proceeds were above the original cost. So for example, say you sold the shares for $150. You would have a capital gain of $50. ($150 proceeds, less $100 cost basis, as calc'd in Part 1);

Part 3 If you haven't sold the shares, and want to transfer them out to the shareholders, it gets more complicated. Simplest way is just sell the shares, then dividend out the proceeds on a percentage basis. In keeping with our example, if you sell the shares for $150, dividend out $30 (20%) of the $150 to Shareholder 1, $30 to Shareholder 2, $30 to Shareholder 3, etc.
Jr. Member
Jan 18, 2017
162 posts
122 upvotes
The short answer here is to use the $22/share price. If this transaction were ever reviewed, CRA would likely look to the legal contract first, see the $22/share price, and conclude that is the legit price.


mazhanlv wrote: Thanks a lot for the detailed explaination!

One question through - the number of shares along with the price was already set long ago and we put in those info in the contract, we signed the contract and performed the service at the publicly listed company. The share price has been increasing for the past 10 months hence we had a significant price difference between the price in the contract and the market price when the shares were actually transferred into our company's account. Should we still use FMV and not the share price in the contract to perform the service?

To illustrate, we signed a contract to perform the service in exchange for 4,000 shares at $22. When the shares were transferred over to our company, the price already had increased to $37. And now it's $45. Which price should we use to record this revenue? Is it $37 as you suggested?

Thank you again!
______
Canadian & US tax guy
Deal Expert
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Aug 2, 2010
15194 posts
4829 upvotes
Here 'n There
I am curious why this public company paid you in shares? Were they that hard up for cash or did you ask for shares instead as payment when you signed the contract?
Deal Addict
User avatar
Aug 15, 2015
1568 posts
194 upvotes
Markham, ON
mazhanlv wrote: We performed some services for another company. Instead of cash, we received some shares as the revenue from our services. However, the value of these shares has increased moderately during the past 3 months and I am not sure how to classify our earnings between regular active income vs capital gains.

My understanding is that the book value of these shares are considered as active income but the appreciation portion on the shares are considered as capital gain and should subject to taxes on capital gain, am I getting it right?

Additionally, the share ownership structure provides 4-5 people are owning this company, each with 20%-30% ownership on the common-voting class A shares. How could we transfer these shares out to our own personal (or corporate) accounts?

Many thanks in advance for your help and advice!
There should have been a service agreement where you clearly outline your service fee and clearly lay out each of your expense items when you perform whatever service you performed.

There are many different service agreements. For example, A one time fee for a specified period of time, A subscription for service agreement, and etc.

That "service" agreement may be a source document to see how much shares you should have received on any given date. The price of a publicly traded company is tallied everyday at the end of the business day.

I am not sure if you were talking about a publicly traded company.

When I say you, I am talking about the "royal" you, since you kept saying pronouns like "we".

Anyways, please feel free to ignore me or out me down as always
[OP]
Newbie
Mar 16, 2017
43 posts
16 upvotes
Toronto
Hi Poppwl, thanks very much for your valuable advice on the service agreement!
Poppwl wrote: There should have been a service agreement where you clearly outline your service fee and clearly lay out each of your expense items when you perform whatever service you performed.

There are many different service agreements. For example, A one time fee for a specified period of time, A subscription for service agreement, and etc.

That "service" agreement may be a source document to see how much shares you should have received on any given date. The price of a publicly traded company is tallied everyday at the end of the business day.

I am not sure if you were talking about a publicly traded company.

When I say you, I am talking about the "royal" you, since you kept saying pronouns like "we".

Anyways, please feel free to ignore me or out me down as always
Deal Addict
User avatar
Aug 15, 2015
1568 posts
194 upvotes
Markham, ON
I don't understand why the shares isn't in your name already? At the very least, the shares should be in the name set out as the service provider on the service agreement, if there was one.

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