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What is the difference between Class
Expert: Merrilyn Reid
I'm going to incorporate my own company in Alberta. What is the difference between Class "A" Common voting shares and Class "B" Common voting shares?
Merrilyn Reid answered:
This question is answered based on the Canadian Income Tax Act as it exists at July 20, 2000.
The Articles of Incorporation (or sometimes a “Schedule to the Articles”) outline the rights, privileges, restrictions and conditions attached to each class of shares. It is common for the Articles to provide for more than one class of voting shares, with no discernable differences other than the class letter A, B, C, etc.
From an income tax perspective, multiple class voting shares may be advantageous where the corporation wishes to declare a dividend to one particular shareholder but not the other. Example: Mr. A and Mrs. A are both shareholders of XYZ Company. Mr. A derives substantial employment income from an external employer but assists with XYZ Company in his spare time. Mrs. A works full-time at XYZ Company and pays herself a small monthly salary. At year-end, XYZ Company's accountant determines that it would be beneficial for Mrs. A to take additional remuneration in the form of a dividend. However Mr. A, with his substantial income, would not benefit, for tax purposes, from a dividend in the current year. XYZ Company will be unable to pay a dividend to Mrs. A alone unless she has a class of shares separate from that of Mr. A. The reason for this is that when a dividend is declared, it is in the form of a specified amount per certain class of share (say $100 per Class B common voting share) rather than a specified amount per specified shareholder (say $10,000 for Mrs. A).
Thus, the preference of many small incorporated companies is to have each managing shareholder own a separate class of voting shares.
In a family-operated, incorporated business prior to January 1, 2000, there was also a tax advantage in naming each child as a shareholder in a separate class. A small dividend could be paid to each child without the child performing business services or incurring any personal income tax. However, effective January 1, 2000, dividends (derived from unlisted shares) paid to shareholders under the age of 18 during the year will be taxed at the top marginal rate. When incorporating, you might still wish to set up your children as shareholders but definitely not pay dividends until the year in which they reach age 18.
About the author
Merrilyn Reid is a Calgary-based management consultant specializing in business process improvement, financing and accounting for entrepreneurial organizations. With extensive experience in public practice accounting and a Master of Business Administration degree in Enterprise Development from the University of Calgary, Merrilyn provides clients across a wide spectrum of industries with an integrated approach to solving problems and optimizing opportunities. Merrilyn can be reached via email at: firstname.lastname@example.org.