Common vs. Preferred Shares in an Ontario Private Corporation: What's the Difference?

If you've looked at any Ontario incorporation document, you've likely seen references to common shares and preferred shares. The distinction sounds like stock-market jargon — and in public companies, it often is — but in a private Ontario corporation, these two share types serve very different practical purposes that matter to founders, families, and investors alike.

Understanding the difference before you incorporate helps you avoid building a share structure you'll need to undo at significant tax cost later.

The Short Version

• Common shares: The fundamental equity ownership of a corporation. Holders participate in all the company's growth (and losses). Usually voting. Usually the last in line to receive dividends or wind-up proceeds.
• Preferred shares: A class of shares with a defined "preference" — usually a priority dividend, a priority claim in a wind-up, or both. Often non-voting. Used for income splitting, estate planning, investor arrangements, and holding company structures.

Common Shares in Detail

What common shares do

Common shareholders own the residual value of the corporation. After preferred shareholders are paid their fixed dividend or wind-up preference, common shareholders get everything that's left. In a successful company, that "everything" can be substantial. In a failed one, common shareholders lose everything.

Voting rights

Common shares almost always carry voting rights. In most private Ontario corporations, voting is done by ordinary resolution (majority) for routine matters and special resolution (two-thirds) for fundamental changes like amending the articles.

Dividend rights

Common share dividends are discretionary — the board of directors declares them when (and if) it chooses. There's no obligation to pay a dividend. This is very different from a fixed preferred dividend.

Multiple classes of common shares

As discussed in our article on share structures, private Ontario corporations often authorize multiple classes of common shares (Class A, Class B, Class C) with different shareholders assigned to each class. This creates flexibility to direct dividends to different family members in different tax years — subject to the federal Tax on Split Income (TOSI) rules. Verify the current rules with your accountant.

Preferred Shares in Detail

The "preference"

The defining feature of a preferred share is some kind of preference over common shares. In a private Ontario corporation, the preference is usually one or both of:

1. Dividend preference: Preferred shareholders receive their dividend before any dividend is paid to common shareholders. The preferred dividend may be fixed (e.g., 8% of the redemption amount per year) or discretionary (declared at the board's choice, but paid before common dividends).

1. Liquidation preference: On a wind-up of the corporation, preferred shareholders receive back their issue price (and possibly accrued dividends) before common shareholders receive anything.

Voting rights

Preferred shares in private corporations typically carry no voting rights on day-to-day matters. They may have special voting rights on specific matters that directly affect their class (e.g., a resolution to amend the rights of the preferred class).

Redeemable and retractable features

Private corporation preferred shares are often designed to be redeemable (the corporation can buy them back at a specified price) and retractable (the shareholder can require the corporation to buy them back). This flexibility is central to estate freezes and other tax planning strategies.

Key Differences at a Glance

When Preferred Shares Are Used in Private Ontario Corporations

Income splitting

A founder or their spouse may hold preferred shares that receive a discretionary dividend in years when their personal income is lower. The corporation pays dividends on the preferred shares, the holder reports that income personally, and the family's overall tax bill may be reduced — subject to TOSI rules.

The estate freeze

In an estate freeze, a founder converts their common shares into fixed-value preferred shares (typically equal to the current value of the business). New common shares — representing future growth — are issued to children, a family trust, or the next generation. The founder is "frozen" at today's value; future appreciation accrues to the new common shareholders. This is a complex transaction requiring accounting and legal advice.

Angel and venture capital investment

Early-stage investors often want preferred shares with a liquidation preference. If the company sells for a modest amount, preferred shareholders are made whole before founders receive anything; if it sells for a lot, the preference is irrelevant and everyone participates. This structure is common in startup financing rounds.

Holdco / Opco structures

When a holding company is set up above an operating company, preferred shares of the operating company may be held by the holding company as part of managing when and how corporate earnings are moved between entities.

Can I Have Both Common and Preferred Shares?

Absolutely — and many private Ontario corporations do. A typical multi-class setup might be:

• Class A Common Shares: voting, participating fully in dividends and wind-up (founder)
• Class B Common Shares: voting or non-voting, same economic rights (spouse or trust)
• Class A Preferred Shares: non-voting, fixed discretionary dividend, redeemable and retractable (used for income splitting or estate planning)

All of these classes are authorized in the articles of incorporation and can be issued (or not) as circumstances require.

Frequently asked questions