Designing a Share Structure for Your Ontario Corporation: A Founder's Guide

The share structure of your Ontario corporation is one of the highest-leverage decisions you'll make at incorporation. Get it right and you have flexibility for tax planning, investor entry, and co-founder arrangements for years. Get it wrong and you'll pay to fix it — or worse, trigger unintended tax consequences when you try to restructure.

This guide explains what a share structure is, why it matters, and how to think through your options before you file articles of incorporation.

What Is a Share Structure?

A share structure is the set of rules defined in your articles of incorporation that describes:

• What classes of shares exist in your corporation
• What rights each class carries (voting, dividends, liquidation preference)
• How many shares of each class are authorized (usually unlimited for private companies)

Share structure is distinct from share issuance — you can authorize multiple share classes without issuing shares in every class immediately. Authorizing classes in advance gives you optionality.

The Core Rights Every Share Can Have (or Not)

Every share class is defined by three fundamental attributes:

1. Voting rights

Does holding this class entitle you to vote at shareholder meetings? Common shares typically vote; preferred shares often don't.

2. Dividend rights

Are dividends fixed (a set dollar amount or percentage, declared before other classes receive anything) or discretionary (directors declare dividends in their judgment, which can vary by class)?

The ability to pay discretionary dividends to different classes at different times is a key income-splitting tool — and a key reason accountants often recommend multiple share classes.

3. Entitlement on dissolution

If the corporation winds up, who gets what's left after creditors are paid? This is sometimes called participation in wind-up proceeds or liquidation preference.

The "Simple" Setup: One Class of Common Shares

The simplest possible share structure is a single class of common shares with voting rights, the right to receive dividends if declared, and participation in wind-up proceeds.

When it works: Solo founder, no plans for income splitting, no investors anticipated, corporation is primarily a vehicle to run one business.

Where it falls short: With one class, you cannot pay different dividends to different shareholders in the same class. Every shareholder in the same class receives the same dividends per share. If you want to pay your spouse a dividend this year and not next year, a single class doesn't give you that flexibility.

The "Flexible" Setup: Multiple Classes of Common Shares

A popular Ontario structure for owner-operated businesses is to authorize multiple classes of common shares — say, Class A, Class B, and Class C — with identical economic rights but issued to different individuals (founder, spouse, adult children, key employees, a holding company).

The articles define each class as having:

• Voting rights (or not, depending on the class)
• The right to receive dividends as and when declared by the board
• Participation in wind-up proceeds

Because each class is technically a separate class, the directors can declare a dividend on Class A shares without declaring one on Class B shares in the same period. This gives you tremendous flexibility in directing corporate income to family members in lower tax brackets — a strategy commonly called an income-splitting arrangement (subject to the federal Tax on Split Income rules; verify the current rules with your accountant).

Preferred Shares: What They Are and When to Use Them

Preferred shares typically carry a fixed or specified dividend and priority over common shares on wind-up, but often no voting rights. They're used for several purposes:

Estate freeze

An estate freeze "freezes" the founder's interest in the corporation at its current value by converting growth-equity common shares into fixed-value preferred shares. Future growth in the company accrues to new common shares held by children, a family trust, or the next generation. This is a tax planning strategy that requires careful advice.

Investor financing

When angels or venture capitalists invest in an early-stage company, they often want preferred shares that give them dividend priority and a preference on exit proceeds ahead of founders' common shares.

Holdco structures

When setting up a holding company above your operating company, preferred shares in the operating company can be issued to the holding company as part of reorganizing accumulated corporate value.

A Common Multi-Class Setup for Ontario Founders

Here's an example of what a well-designed share structure for a two-founder Ontario corporation might look like — note this is illustrative, not a template you should copy without advice:

• Class A Voting Common Shares — Held by Founder 1; voting, participating
• Class B Voting Common Shares — Held by Founder 2; voting, participating
• Class C Non-Voting Common Shares — Reserved for key employees or a family trust; non-voting, participating in dividends
• Class A Preferred Shares — Non-voting, fixed discretionary dividend, redeemable and retractable; for income splitting or estate planning

Each class is authorized but not necessarily issued at incorporation. You issue shares as your needs evolve.

What "Redeemable" and "Retractable" Mean

You'll often see preferred shares described as redeemable and retractable:

• Redeemable: The corporation has the option to buy back the shares at a set price.
• Retractable: The shareholder has the option to require the corporation to buy back the shares.

These features are used in estate freezes and income-splitting arrangements to allow value to flow in and out of the corporation in a controlled, tax-planned way.

Interaction With Tax Law

Your share structure and your accountant's tax planning strategy need to align. The most common tax interactions include:

• Lifetime Capital Gains Exemption (LCGE): To claim the LCGE on a sale of shares, the shares must qualify as "Qualified Small Business Corporation" shares under the Income Tax Act. Share structure can affect qualification — verify with your accountant.
• Tax on Split Income (TOSI): Federal rules limit income splitting through corporations in certain circumstances. Whether your income-splitting arrangement works depends on the facts.
• Corporate reorganizations: Changing share structure after the fact can trigger deemed dispositions and taxable events unless structured carefully under the relevant provisions of the Income Tax Act.

Frequently asked questions