Income treatment for purchase of own shares

Payments by companies to repurchase their own shares are subject either to what is referred to as 'income treatment' or to 'capital treatment'.

If the payment is subject to 'income treatment' then some of the amount received is treated as a distribution if the amount the recipient receives exceeds his original capital subscription.

The distribution element, ie the net dividend received, will be the amount received on the share buy back less the original subscription price of those shares. The subscription price is normally the same as the nominal value of the shares.

The capital element is essentially the original subscription price of the shares. Any new consideration received by the company for the shares is also treated as capital.

Consequently, if the shareholder was the original subscriber of the shares, this computation will result in a capital gain of nil. If the individual was not the original subscriber, a capital loss will arise.