What’s the Right Structure? Part 2: Voting vs. Non-Voting Shares
When structuring a corporation, choosing the right type of shares to issue is a technical exercise centered around questions of control, access to dividends, and long-term planning. In this article, we explore the key differences between voting and non-voting shares and how these types of shares can be used strategically in business ownership and succession planning.
What Are Voting Shares?
Voting shares give their holders the right to participate in major corporate decisions. Most importantly, these shareholders can vote to elect the board of directors which are the individuals who steer the corporation and its day-to-day business. Depending on the share structure, voting shares may also grant a say in approving sales or mergers, issuing shares to new shareholders or investors, or other significant corporate actions. These shares are typically held by founders, key executives or controlling shareholders.
In short, voting shares carry decision-making power over fundamental decisions of a corporation as well as appointment to or removal from the board of directors, and with that, ultimate control over the company’s direction.
What Are Non-Voting Shares?
Non-voting shares, as the name suggests, do not entitle their holders to vote on corporate matters. However, this doesn’t make them meaningless. Non-voting shareholders:
- Can be entitled to receive dividends
- Benefit from increases in the value of the company
- May have priority rights on dividends or liquidation, depending on the share class and its attributes
Non-voting shares are common in:
- Family-owned businesses, where the founder wants to share economic value with children or spouses without giving up control
- Employee incentive structures, such as stock options or share bonuses
- Private companies looking to attract passive investors
Essentially, non-voting shares offer economic participation without the power to influence company direction.
When to Use Non-Voting Shares
There are several planning scenarios where non-voting shares can be highly effective:
- Sharing Income Among Family Members
Non-voting shares are often issued to spouses or adult children to enable income splitting, so long as it aligns with the Tax on Split Income (TOSI) rules which came into effect in 2018.
‘Income Splitting’ refers to the ability of a business owner to ‘sprinkle’ bits of income to various members of his or her family including children, brothers, sisters and parents, so as to reduce that business owner’s overall tax obligation.
To illustrate, if Bob earned $100,000 in dividend income from his corporation in Ontario, he would pay approximately $17,067 in tax in that year. However, if Bob distributed $20,000 of income to his daughter, $20,000 to his son and $20,000 to his spouse, Bob would only pay tax on $40,000 (while his family members paid tax on their respective $20,000). On the $40,000 that Bob took as dividend income, he would only pay $1,497 in tax. Each of his children and spouse would only pay $192 in tax on their $20,000 income. When adding all the tax obligations of the family together, Bob only pays $2,073 in tax ($1,497 + $192 + $192 + $192) on his $100,000 of dividend income instead of $17,067 if he hadn’t used income sprinkling; thereby saving approx. $14,994 in tax in that one year. This is a significant tax saving.
In such a scenario, a business owner would not wish to grant his family members voting rights over the corporation – the intention was only to split income. Therefore the owner would issue non-voting common shares to his family to enable the above.
However, due to the new TOSI rules, keep in mind that if the child/spouse is under the age of 25, he or she must work for the business in order to receive a dividend. If the child/spouse is over the age of 25 but under 65, then he or she must hold 10% of the votes and value of the corporation and so non-voting shares will not suffice unless the family member also contributes to the business. If you wish to consider income splitting in greater detail, please contact us to speak with one of our lawyers.
- Estate Freezes
An estate freeze is a common tax planning tool where a business owner “freezes” the current value of their shares and issues new non-voting growth shares to family members or a trust. In other words, the business owner wishes to transfer the future growth (meaning the business’s future value and profits) to his or her children but does not necessarily wish to give up voting control just yet. In such a scenario, he or she would issue the new generation non-voting common shares until he or she was ready to transition control in addition to profit distribution.
These business succession maneuvers are completed under s.86 of the Income Tax Act. Keep in mind that Bill C-59, which received Royal Assent on June 20, 2024, amends the Income Tax Act to refine the business succession rules for intergenerational transfers. The benefit of the new rule is that the retiring shareholder can now claim access to the Lifetime Capital Gains Exemption on his or her exit. However, Bill C-59 restricts this to genuine transfers by requiring the parent to fully relinquish control and involvement, with two options an immediate transfer (completed within 3 years) or a gradual transfer (completed over 5–10 years). Both options allow access to the LCGE if met, but failure to comply could recharacterize gains as taxable dividends (at higher rates) and disallow the LCGE.
Therefore a key feature of the new rule is that non-voting shares cannot be given to the new generation if the intention is to claim the LCGE. If you wish to discuss these new business succession rules, please contact us to speak with one of our lawyers.
Important Considerations re non-voting shares
Even though non-voting shares don’t grant decision-making power, they’re not without rights. Under the Ontario Business Corporations Act (OBCA) and Canada Business Corporations Act (CBCA), non-voting shareholders are still entitled to, financial disclosures, fair treatment and certain remedies in cases of oppression or unfair prejudice. For this reason, non-voting shares should not be issued carelessly without thorough consideration.
Conclusion
Not all shares are equal, and control is not always straightforward.
When structuring ownership for tax efficiency, succession planning, or investment, the distinction between voting and non-voting shares is crucial. As well, the rules governing the use of non-voting shares are complex and demand careful consideration.
Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and private M&A law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law.
© Kalfa Law Firm , 2025
The above provides information of a general nature only. This does not constitute legal or accounting advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.
