In Canada, Common Shares typically provide voting rights and participate in the company’s growth, while Preferred Shares act more like a fixed investment, offering priority dividend payments and protection if the business liquidates. Properly structuring your share classes is essential for tax planning, estate freezes, and bringing in new investors.
When you first incorporate a business in Vancouver, Edmonton, or Montreal, you are usually issued a basic set of Common Shares. 🏢 This basic structure works well when you are a solo entrepreneur. However, as your company grows, bringing in silent investors or passing the business down to your children requires a much more sophisticated legal structure. This is where understanding the power of share classes becomes vital.
Canadian corporate law allows you to create highly customized share structures. 💼 By issuing Preferred Shares alongside Common Shares, you can completely separate voting control from financial entitlement. You can give a family member shares that pay a steady dividend but offer absolutely no voting power over daily operations. Mismanaging your corporate share structure can lead to severe tax consequences, making it critical to do it right from the start.
Step-by-Step Process in Canada
Whether your corporation is registered federally or provincially (like under the Ontario Business Corporations Act), the mechanics of creating and issuing shares are very similar. 📝 You cannot just print a stock certificate; you must legally alter your corporate constitution. Here is the step-by-step process most Canadian law firms use to structure multiple share classes.
Step 1: Reviewing the Articles of Incorporation
Your current Articles of Incorporation explicitly state exactly what types of shares you are legally allowed to issue. 🔍 If your current articles only authorize an unlimited number of Common Shares, you cannot issue Preferred Shares yet. You must hire a corporate lawyer to file “Articles of Amendment” with the government registry to formally create the new preferred class.
Step 2: Defining the Share Attributes
This is the most important legal step. ✍️ When creating Preferred Shares, your lawyer must define their exact “attributes.” Will they have a fixed 5% annual dividend? Are they redeemable (meaning the company can buy them back at a set price)? Are they strictly non-voting? The Canada Revenue Agency (CRA) reviews these attributes closely during tax audits to ensure they comply with corporate tax rules.
Step 3: Executing Corporate Resolutions
Once the government approves your new share classes, the company’s board of directors must pass formal resolutions. 🗄️ These resolutions authorize the company to issue the specific Preferred or Common Shares to a named individual or holding company. The directors must also set the price at which the shares are being issued, ensuring it reflects fair market value.
Step 4: Updating the Minute Book and Registries
In Canada, verbal agreements mean nothing in corporate law. 📚 You must immediately update your corporate Minute Book. This includes updating the Central Securities Register to show who owns the new shares, cancelling any old share certificates if necessary, and issuing brand new, legally signed share certificates to the investors or family members.
How Much Does it Cost in Canada?
Restructuring a corporation to include preferred shares is a highly technical legal process. 💵 You are completely altering the ownership DNA of the company. Expect to pay specific legal and administrative costs in Canadian dollars (CAD):
- Government Filing Fees: Filing Articles of Amendment to create new share classes usually costs between $150 and $200 CAD depending on your province.
- Corporate Lawyer Fees: Having a law firm draft the complex share attributes and board resolutions generally ranges from $1,000 to $3,500 CAD.
- Tax Reorganization (Estate Freeze): If you are issuing preferred shares as part of a Section 86 estate freeze (to pass tax burdens to the next generation), accounting and legal fees combined can easily exceed $5,000 to $15,000 CAD.
| Share Attribute | Common Shares | Preferred Shares |
| Voting Rights | Usually Yes (Full Control) | Usually No (Silent Partner) |
| Dividend Priority | Paid last (Variable amount) | Paid first (Often fixed amount) |
| Capital Growth | Increases as company grows | Usually capped at redemption value |
How Long Does the Process Take?
Amending your Articles of Incorporation is relatively quick. ⚡ Most provincial registries and Corporations Canada process the actual digital filing within 24 to 48 hours.
However, the real timeline depends on the legal planning. 📅 Drafting the specific share attributes, ensuring they do not trigger unintended tax consequences under the Income Tax Act, and obtaining a proper business valuation from your CPA can take anywhere from 3 to 6 weeks. Do not rush this process, as fixing a flawed share structure later is incredibly expensive.
Frequently Asked Questions (FAQ)
Can Preferred Shares qualify for the Lifetime Capital Gains Exemption (LCGE)?
Generally, yes, if they meet the strict definition of Qualified Small Business Corporation (QSBC) shares. However, because preferred shares are often frozen at a fixed value, the actual capital gain to exempt is usually found in the common shares.
What is an Estate Freeze?
An estate freeze is a tax strategy where the founder exchanges their growing common shares for fixed-value preferred shares. New common shares are then issued to their children, meaning all future growth (and future tax liability) is passed to the next generation.
Do Preferred Shares have to pay a dividend every year?
Not necessarily. It depends entirely on how your lawyer drafts the share attributes. They can be cumulative (if you miss a year, you owe it later) or non-cumulative. The directors still have to declare the dividend officially.
Can I just issue shares to my spouse to split income?
You must be very careful. The CRA enforces strict Tax on Split Income (TOSI) rules. If your spouse does not actively work in the business or meet specific age and ownership exemptions, the dividends paid to them could be taxed at the absolute highest personal tax rate.
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