How Share Structure Works in a Canadian Corporation
When lawyers and accountants talk about “share structure,” they are usually talking about one practical question, who controls the company, and who gets its economic value? In most private Canadian corporations, those two things do not need to belong to the same people. A founder can hold all the voting power, while a spouse, adult children, or a family trust holds shares that participate in growth and receive dividends without having any say in day-to-day decisions. The legal tool that makes this possible is the creation of multiple share classes, including shares that carry no vote at all.
Understanding how voting and non-voting shares work is essential for any business owner thinking about income splitting, an estate freeze, selling the company, or simply protecting control during a family or partnership arrangement. This article explains the mechanics, the tax rules, and the corporate law safeguards every Canadian shareholder should know.
What Are Voting Shares?
A voting share is any share that carries the right to vote at shareholder meetings. Under the Ontario Business Corporations Act (“OBCA”), R.S.O. 1990, c. B.16, and the Canada Business Corporations Act (“CBCA”), R.S.C. 1985, c. C-44, at least one class of shares in every corporation must carry both the right to vote and the right to receive residual assets on dissolution. That class is typically called “common shares” in small private companies. Voting shareholders elect the board of directors, approve fundamental changes to the corporation (such as amalgamations, continuances, and amendments to articles), and pass or defeat shareholder resolutions. Control in the practical sense flows from holding enough voting shares to outvote everyone else.
In a simple one-class structure, voting and economic rights are bundled together. Every shareholder receives the same vote, the same dividend, and the same proportionate share of proceeds on a sale. That simplicity is attractive, but it limits planning flexibility considerably.
What Are Non-Voting Shares?
A non-voting share is a share that participates in the economic life of the corporation receiving dividends, appreciating in value, and sharing in proceeds on a winding-up or sale without carrying any right to vote. Canadian corporate statutes permit corporations to create as many share classes as they wish, each with its own combination of rights, privileges, restrictions, and conditions, provided those rights are set out in the articles of incorporation.
Non-voting shares are often created as a separate class of common shares (sometimes called “Class B” or “Class C” common shares) or as preferred shares carrying defined dividend or redemption rights. The articles will specify whether the class votes, whether dividends are discretionary or fixed, whether the shares are redeemable or retractable, and how the class participates on a winding-up. Within those parameters, the shareholders’ agreement can add further restrictions on transfer and governance.
Why Canadian Business Owners Create Multiple Share Classes
The reasons for creating a multi-class share structure in a private Canadian corporation typically fall into four categories, control separation, income splitting, estate planning, and lifetime capital gains exemption multiplication.
Control separation
Control separation is the oldest reason. A founder who brings in investors, partners, or even adult children may want those parties to share in profits without sharing in governance. By issuing non-voting shares (or shares with inferior voting rights) to the incoming parties and retaining all voting common shares personally, the founder preserves decision-making authority regardless of the economic split. This structure also appears in dual-class public corporations where founders hold supervoting shares carrying, say, ten votes per share, but the planning principle is identical.
Income splitting
Income splitting through non-voting shares allows a business owner to pay dividends to family members who hold those shares, potentially taxing that income at a lower marginal rate than the owner’s own. For many years this was a widely used strategy in privately held corporations. The Tax on Split Income rules (“TOSI”) under section 120.4 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (“ITA”), significantly curtailed but did not eliminate this planning after 2017. TOSI is discussed in detail below.
Estate freezes
Estate freezes using non-voting preferred shares are one of the most common succession planning techniques in Canada. Section 86 of the ITA allows a business owner to exchange their growth common shares for fixed-value preferred shares (freezing the estate at today’s value) while issuing new participating common shares to the next generation or a family trust. The preferred shares are typically voting to maintain control, while the new common shares may be non-voting. On the eventual sale of the business, the preferred shareholder exits at a known, capped amount while the common shareholders (children or trust beneficiaries) capture all the future growth.
LCGE multiplication
LCGE multiplication through a family trust or multiple common shareholders is the fourth major driver. Each individual Canadian resident is entitled to claim the Lifetime Capital Gains Exemption under section 110.6 of the ITA on qualifying small business corporation shares currently approximately $1,250,000 in capital gains (indexed annually). If a family trust holds common shares on behalf of three adult beneficiaries, the trust can allocate the gain to each beneficiary on a sale, potentially sheltering up to $3,750,000 of combined gain from capital gains tax. Each beneficiary’s shares must themselves qualify as qualified small business corporation (“QSBC”) shares under section 110.6(1) of the ITA, which requires (among other conditions) that the corporation be a Canadian-Controlled Private Corporation, that more than 50% of the fair market value of the corporation’s assets be used in an active business in Canada at the time of sale, and that 90% of assets satisfy that test throughout the 24-month period immediately before the sale.
TOSI and the Limits on Income Splitting Through Non-Voting Shares
The TOSI rules in section 120.4 of the ITA impose the highest personal marginal rate, approximately 53.53%, in Ontario on “split income” received by a “specified individual.” The concern Parliament was addressing was income earned in a business being streamed to adult family members who do not actively participate in that business in order to benefit from their lower marginal rates.
Under the TOSI rules as they currently stand, dividends paid on shares held by a related adult family member (age 18 or older) will be subject to TOSI and therefore taxed at the top marginal rate unless one of the statutory exclusions applies. The main exclusions are that the recipient is 25 years of age or older and holds shares that are not “excluded shares” only because they were received as a gift or non-arm’s-length transfer. The recipient made a meaningful labor contribution to the business (generally defined as working at least 20 hours per week in the business for the current year or five of the preceding ten years), the income is reasonably attributable to arm’s-length risk capital contributed by the recipient, the recipient is 65 or older, the paying corporation is a business in which the recipient’s spouse made meaningful contributions, or the income relates to property received as part of a death rollover.
The practical effect of TOSI is that simply issuing non-voting shares to a spouse or adult child and paying dividends on those shares will often not achieve tax savings anymore unless the recipient qualifies for an exclusion. Income splitting through non-voting shares now requires careful analysis of whether and how each family member participates in the business. A lawyer at Kalfa Law Firm can help assess whether your family’s circumstances qualify for any of the available exclusions and structure the share classes accordingly.
Estate Freezes and Preferred Shares Under ITA Section 86
One of the most sophisticated uses of a multi-class share structure involves an estate freeze, typically implemented under section 86 of the ITA. An estate freeze allows a business owner whose shares have increased significantly in value to crystallize that accrued gain at today’s value, often triggering the LCGE to shelter the gain while passing future growth to the next generation or a family trust at a nominal cost.
In a typical section 86 freeze, the owner exchanges their existing common shares for preferred shares with a fixed redemption value equal to the current fair market value of the common shares. The corporation simultaneously issues new common shares at nominal value, because the preferred shares have captured all existing value to the owner’s children, a family trust, or both. The preferred shares usually carry a fixed, cumulative dividend and a right of redemption at the frozen value. They may or may not carry voting rights depending on whether the owner wishes to retain control.
The reason many practitioners give the preferred shares the vote (despite their fixed economic value) is precisely that control is the most important thing to preserve. The owner has given away future growth, but they have not given away the board seat. The new common shares held by the next generation are non-voting, or carry only limited voting rights, ensuring that governance remains with the founder until succession is ready to complete.
The tax treatment of the exchange must be carefully managed. Under section 86 of the ITA, the exchange of shares in the course of a reorganization of capital is generally a tax-deferred transaction, provided the conditions are met and no proceeds of disposition exceed the adjusted cost base of the shares given up, unless the owner elects to trigger a gain (for example, to use the LCGE). The stop-loss rules under section 84.1 of the ITA apply to prevent surplus stripping through inter-generational non-arm’s-length transfers, so the mechanics must be structured by experienced tax counsel.
Protections for Non-Voting Shareholders Under Canadian Corporate Law
A common concern when issuing non-voting shares to family members, employees, or investors is whether those shareholders have any protection if the controlling shareholders act in a way that is detrimental to their interests. The answer is yes, but the protections operate differently from the voting mechanism itself.
Class votes
Class votes provide one layer of protection. Under section 170 of the OBCA (and section 176 of the CBCA), amendments to the articles that would adversely affect the rights attached to a particular class of shares require the approval of that class by special resolution even if those shares carry no general vote. This means a controlling shareholder cannot unilaterally change the dividend terms, liquidation rights, or other economic features of the non-voting class without the consent of the holders of that class. The class vote mechanism is a meaningful protection, though it is limited to changes to the articles themselves.
The oppression remedy
The oppression remedy under section 248 of the OBCA (and section 241 of the CBCA) is a broader and more flexible protection. It allows any shareholder, including a holder of non-voting shares to apply to the court for relief if the conduct of the corporation or its controlling shareholders is “oppressive or unfairly prejudicial to or unfairly disregards the interests” of the complainant. Courts have applied the oppression remedy to a wide range of conduct, including dilution of non-voting shareholders’ economic interests, exclusion from participation in the corporation’s affairs, and misappropriation of corporate opportunities. Unlike a class vote, the oppression remedy requires going to court, which involves time and expense, but it is a substantial backstop against bad faith.
Dissent rights
Dissent rights under section 185 of the OBCA (and section 190 of the CBCA) allow a shareholder to dissent from certain fundamental changes, including amalgamations, continuances, and amendments to articles that adversely affect the dissenting class and require the corporation to pay fair value for the dissenting shareholder’s shares. Non-voting shareholders retain these dissent rights, which cannot be contractually eliminated. The Kalfa Law Firm article on minority shareholder appraisal rights provides a detailed walkthrough of the dissent procedure.
Unanimous Shareholder Agreements
(“USAs”) under section 108(2) of the OBCA (and section 146 of the CBCA) allow shareholders to restrict or transfer powers of the directors to the shareholders and to impose obligations on the corporation or its shareholders. A well-drafted USA can give non-voting shareholders additional protections that go beyond what the corporate statute provides for example, veto rights on specific transactions, preemptive rights on new share issuances, anti-dilution provisions, tag-along rights on a sale of control, and information rights. Many private Canadian corporations rely on the USA rather than the voting mechanism to give minority shareholders meaningful influence over key decisions.
What Happens to Non-Voting Shares on a Sale of the Business?
The economic rights attached to shares including non-voting shares are fully engaged when a company is sold. In a share purchase, a buyer acquires all of the issued and outstanding shares, which means non-voting shareholders must deal or consent to the sale. The articles, the USA, and any drag-along or tag-along provisions will govern the mechanics. A drag-along clause allows the controlling shareholder to force non-voting shareholders to sell their shares on the same terms, completing the transaction cleanly. A tag-along clause allows non-voting shareholders to participate in any sale of control on the same terms offered to the majority, protecting them from being left behind.
The LCGE qualification analysis applies equally to non-voting common shares, provided those shares themselves qualify as QSBC shares under section 110.6(1) of the ITA. Each shareholder, including a trust beneficiary to whom a gain is allocated must satisfy the QSBC share test independently. The 90% active business asset test and the 24-month holding period apply to the shares being sold, not the class broadly, which is another reason to structure the share classes and holding periods carefully from the outset.
On a wind-up or dissolution, the articles determine priority. Preferred shares with a defined liquidation preference rank ahead of common shares, which means preferred shareholders (often the estate-freeze generation) receive their frozen value first, with any residual going to the common shareholders (the next generation).
How Non-Voting Shares Are Created in Practice
Non-voting shares are created by including the appropriate provisions in the articles of incorporation when a corporation is incorporated or by amending the articles afterward. The articles must specify each class of shares and the rights, privileges, restrictions, and conditions attached to that class. To add a new class of non-voting shares to an existing corporation, the directors typically pass a special resolution to amend the articles under section 168 of the OBCA or section 173 of the CBCA, which then goes to the shareholders for approval.
The articles alone set the class rights. The shareholders’ agreement (or USA) then layers on additional private contractual arrangements between the parties. Neither the articles nor the shareholders’ agreement is publicly filed in a way that discloses the economic terms. The Ontario Business Registry shows that multiple classes exist, but not what dividends were paid or what the shareholding percentages are.
Once the classes are created, shares are issued by resolution of the directors at a price determined by the board. For income-splitting or estate-freeze purposes, the valuation of shares at issuance is critical, because the CRA can challenge transactions that transfer value between non-arm’s-length parties at non-fair-market-value prices. A formal business valuation should be obtained whenever shares are being issued or transferred in a planning context.
When Voting vs. Non-Voting Structure Matters Most
Not every business needs multiple share classes. A sole shareholder who plans to sell the business outright within a few years may be well served by a simple common share structure. The complexity of multiple classes is most justified when more than one of the following is true, there are multiple shareholders with different roles, there are family members who will receive economic benefits but not exercise control, there is a plan to bring in the next generation over time, the business has grown to the point where the LCGE creates meaningful tax shelter to multiply, or the owner wants to protect future growth from their own estate without triggering a current tax event.
When those facts are present, the question is not whether to create multiple share classes but how to design them. The interplay between TOSI, section 86, section 110.6(1), and the shareholder protection provisions of the OBCA means that the optimal structure depends heavily on the specific circumstances of the business, the family, and the exit timeline. That design work belongs in the hands of corporate and tax counsel working together.
Ready to Structure Your Shares the Right Way?
Whether you are setting up a corporation for the first time, adding family members as shareholders, planning an estate freeze, or preparing for a future sale, the share structure you create today will govern your tax outcomes, your succession, and your control for years to come. Kalfa Law Firm advises Canadian business owners and their families on structuring multiple share classes, navigating TOSI, implementing estate freezes under section 86, and maximizing LCGE eligibility. Contact us to discuss your specific situation.
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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. Updated October 19, 2026.
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.
