Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to creating a limited liability company or amending a corporation’s articles of incorporation, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto and Ottawa business lawyers registered on the website who can answer your questions or help you with your Ontario or Federal corporations.
Sure, you’ve heard it before: corporations typically have Class A shares (or common voting shares) and Class B shares (or preferred non-voting shares). But have you heard of Class C shares which are designed specifically for income-splitting? The reality is that, so long as you have one type of common voting share, you can be quite innovative with the characteristics you assign to other classes of shares.
So lets get into nitty gritty of what I mean byClass C “income-splitting” shares. Basically, these are a class of shares that are subservient to Class A and Class B shares in virtually all regards. Specifically, you can design Class C shares such that they:
- have no voting rights;
- have no voting rights or right to dissent with respect to issues revolving around shares, classes of shares, cancellation of shares, issuance of shares, etc.;
- have a right to receive a non-cumulative dividend (as determined and declared by the board of directors from time to time);
- be redeemable by the corporation for a pre-determined price (e.g. $1.00);
- be redeemable by the corporation upon liquidation, dissolution, or winding up for a pre-determined price (e.g. $1.00 each);
- be denied entitlement to any additional profit above and beyond what was declared by the board (which would go to Class A and/or Class B shareholders)
So what’s the purpose of having such a subservient class of shares subect to the rights and entitlements of Class A and Class B shares? Simple: keep corporate control out of these shareholders’ hands while giving them compensation in the form of dividends from time to time . These class of shares can be redeemed (which means cancelled) for a pre-determined “redemption amount”. Overall, this class of share seems good for a silent investor who is comfortable with not getting involved in the long-term or day-to-day decision making that is undertaken by the Class A voting shareholders, the board of directors, and the executive team (i.e. the President, Vice-President, Secretary, Treasurer, etc.). The difficulty with these class of shares may be in trying to value them (i.e. getting to a “redemption amount”). This will be negotiated by the corporation (through its directors/officers) and the potential shareholders. Typically, valuing shares is based on the future earning potential of the corporation discounted to today and then divided among the shares. When you add up all the future expected dividends of a particular class of shares, you’ll end up with something that resembles the future price of the share today. It’s more of an art than a science to value shares. Getting a professional valuator, accountant, or lawyer involved could help get to a fair market value. At the end of the day, the value of a Class C preference income-splitting shares will be whatever the potential shareholder and the corporation are willing to agree upon (which depends on a number of real life circumstances).
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