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Canadian FAQ – Shareholders’ Equity – What You Need To Know!



Grant Gilmour

What is Shareholders’ Equity? Shareholders’ Equity is often used to measure the net worth of a company. It is used to assess the financial strength of a company.

Discussion:

Shareholders’ Equity (also commonly referred to as Owners’ Equity) comes from two sources:

  1. Share Capital — Capital directly invested in the company by the shareholders
  2. Retained earnings – Profits that have been reinvested into the company rather than paid out to the shareholders through dividends (See FAQ #155 on Retained Earnings)

Shareholders’ Equity can be calculated in two ways:

  1. Assets less Liabilities
  2. Share Capital plus Retained Earnings

For example: Company ABC has Assets of $100,000, Liabilities of $50,000, Share Capital of $1,000 and Retained Earnings of $49,000:

Share Capital = $100,000 – $50,000 (Assets – Liabilities) = $50,000 or
Share Capital = $1,000 + $49,000 (Share Capital + Retained Earnings) = $50,000

The Shareholders’ Equity reflects the financial health of a company. If the company has had profitable years and has reinvested the profits into assets of the company, it will have a positive Shareholders’ Equity. If the company’s losses exceed its profits, or if Liabilities exceed Assets, the company will have a negative Shareholders’ Equity.

Positive Shareholders’ Equity represents the amount that would be returned to shareholders should the company liquidate. Negative Shareholders’ Equity means the company does not have enough assets to cover its debt. A company with negative Shareholders’ Equity may be at risk of loan default or bankruptcy.

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If you are interested in discussing the health of your company and your Shareholders’ Equity, get in touch.

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Grant has been in the CA business since 1988, starting his own practice in 1994. His tax expertise encompasses tax planning, international tax issues, and Scientific Research and Development tax credits. He is a graduate of the CICA In-Depth Tax Course and in 2012, Grant received the CA Community Service Award and the Scout Leader Medal.

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