Understanding Corporate Share Structure in Canada

When incorporating a business in Canada, one of the most critical decisions you’ll make is how to structure your shares. Corporate share structure determines ownership, control, and financial distribution within your company. In this guide, we’ll walk you through the basics of corporate share structure, common pitfalls, and tips on setting up the best structure for your business.

A share represents a unit of ownership in a company. The number of shares you own determines your ownership percentage. For example, if a company has 100 shares and you own 50, you control 50% of the company. Shares also entitle you to a portion of the company’s assets and profits.

Shares can vary in their characteristics, which can influence your rights as an owner. Let’s dive into the different types of shares.

Types of Shares

Voting vs. Non-voting Shares

Voting shares provide the owner with the right to vote on company decisions, such as electing the board of directors.
Non-voting shares do not grant voting rights and are often held by investors who are more focused on financial returns than on controlling the company.

Common vs. Preferred Shares

Common shares allow shareholders to vote and receive dividends, but are often last in line to receive payment if the company dissolves.
Preferred shares typically don’t offer voting rights but have a higher claim on assets and earnings. Preferred shareholders often receive fixed dividends before common shareholders.

Companies may issue different classes of shares, such as Class A, B, C, etc., each with unique voting rights and dividend rules. This allows for flexible ownership and control structures.

Authorized vs. Issued Shares

Authorized shares are the maximum number of shares a company can issue, as outlined in its articles of incorporation.
Issued shares are the shares that have actually been distributed to shareholders.

It’s essential to understand the concept of dilution. When more shares are issued, the ownership percentage of existing shareholders decreases. For example, if you own 100 shares in a company with 1,000 total shares, and the company issues another 1,000 shares, your ownership percentage drops from 10% to 5%.

Understanding your share structure is important for several reasons:

Legal Ownership

Your share structure defines legal ownership of the company. It’s vital to ensure that ownership and control are clear and undisputed. Always consult a lawyer to ensure your share structure complies with the law.

Dividends and Tax Implications

Dividends are paid out based on share class ownership. For example, if you and your spouse each own 50 Class A shares, dividends will be split equally. This setup might limit your flexibility in distributing dividends and could have tax consequences if your spouse is not active in the company.

To avoid potential issues, consider setting up separate share classes for different types of owners. This allows for greater flexibility in dividend distribution and can help optimize your tax situation. If your current share structure isn’t meeting your needs, seek legal assistance to reorganize your shares.

Single Owner

If you’re the sole owner, a simple structure where you own 100% of the company with Class A shares may be sufficient. However, recent changes in tax laws, such as the tax on split income (TOSI), should be considered if you plan to include a spouse in ownership.

Multiple Owners

For companies with multiple owners, setting up separate share classes can be beneficial. For instance, you might have Class A shares for voting and separate classes (e.g., Class B and C) for dividend distribution. This setup allows you to manage dividends based on each owner’s tax situation and financial needs.

Key Recommendations

Plan Ahead

A well-thought-out share structure can save you headaches down the line. Consider your future needs and potential changes in ownership to set up a structure that supports your business goals.

Get Legal Assistance

Whether you’re incorporating or restructuring your shares, consulting with a lawyer is essential. They can help you work through the issues and ensure everything is done correctly and legally.

Consult an Accountant

Proper share structure planning can potentially lead to significant tax savings. An accountant can help you set up different classes of shares and plan dividend distributions to maximise your tax benefits. It’s also a good idea to reach out to an accountant to fully understand the tax consequences of your chosen share structure, ensuring that you make informed decisions that align with your financial goals.

What is a Share?