Final answer:
The income tax impact for a shareholder who has 25 shares redeemed at $10 per share by a private corporation would include reporting a deemed dividend of $150 and a taxable capital gain of $62.50, based on a PUC of $4 and an ACB of $5 per share.
Step-by-step explanation:
Income Tax Impact of Share Redemption
The question relates to the income tax impact on a shareholder for the redemption of shares in a private corporation. For the given scenario, a corporation wants to redeem 25 shares at $10 per share. The Paid-Up Capital (PUC) per share is $4, and the Adjusted Cost Base (ACB) per share is $5. When shares are redeemed, the amount received by the shareholder over the PUC is treated as a deemed dividend according to tax regulations.
In this situation, the amount received per share is $10, and the PUC is $4, leaving a difference of $6 ($10 - $4) per share to be treated as a deemed dividend. This means the shareholder will report a deemed dividend of $150 ($6 x 25 shares). The ACB of the shares does not directly affect the deemed dividend but will impact the calculation of capital gains if the shares were sold rather than redeemed.
However, since the redemption price is higher than the ACB, there is also a capital gain to consider. The gain will be the difference between the redemption value ($10) and the ACB ($5), which is $5 per share. The total capital gain for the 25 shares redeemed would be $125 ($5 x 25 shares), but only 50% of this gain is taxable in most jurisdictions, resulting in a taxable capital gain of $62.50.