What are preferred shares and when would an Ontario corporation issue them?

Preferred shares are a separate class of shares that carry different rights from common shares — typically, preferential treatment in one or more of three areas: dividends, liquidation proceeds, and redemption.

On dividends, preferred shareholders often receive a fixed or cumulative dividend before any dividend is paid to common shareholders. On a wind-up or sale, preferred shareholders typically recover their invested capital (and sometimes a premium) before common shareholders receive anything. Some preferred shares are also redeemable — the holder or the corporation can require the shares to be bought back under set conditions.

Ontario corporations commonly issue preferred shares when bringing in outside investors who want some level of downside protection without giving up voting control, or in the context of estate and tax planning for family corporations. For example, in a standard estate freeze, a business owner converts their common shares into preferred shares with a fixed value, while new common shares are issued to the next generation (or a family trust). This freezes the owner's tax exposure at today's value while future growth accrues to the new shareholders.

Preferred shares must be authorized in the articles of incorporation before they can be issued. A corporate lawyer and tax advisor working together can help you design a preferred share class that meets your goals.