Corporate Share Structure Setup Calculator

How Many Shares to Issue When Incorporating

This is the question everybody asks and it is the least important one on the form. The number of shares is arbitrary. What matters is the proportion, because a shareholder owns a fraction of the company rather than a quantity of anything.

One hundred shares split sixty and forty is identical in every legal and tax respect to one million shares split six hundred thousand and four hundred thousand. There is no advantage to either, and the idea that a larger number looks more substantial has no basis in the statute.

We normally suggest one hundred shares for a founder group, or one thousand where there are several people and the splits are uneven enough that whole numbers matter. Small numbers are easier to read on a share register, easier to divide when somebody new arrives, and easier to explain to a lender.

What does matter is the subscription price. Shares issued for a nominal amount give the corporation nominal paid-up capital, and that is usually what you want, because paid-up capital is the amount that can come back out to the shareholder tax free and a low figure is rarely a problem at the start. Capital beyond the subscription should go in as a shareholder loan, which is repayable tax free at any time and does not complicate the cap table.

Share Structure for a Canadian Corporation and Why Classes Exist

A share class is a bundle of rights. Three of them do almost all of the work: the right to vote, the right to receive a dividend, and the right to share in what is left on a wind-up.

A single class of common shares carries all three, and every holder of that class has to be treated identically. That is the problem. If you and your spouse both hold the same class, a dividend declared on the class goes to both of you in proportion. You cannot pay one of you ten thousand dollars and the other nothing, because a dividend is declared on a class rather than on a person.

Separate classes solve that. Class A voting common for the founders, Class B non-voting common for a spouse, Class C for another family member. Each class can receive a dividend independently of the others, which is the whole mechanism behind dividend flexibility in a private corporation.

Non-voting matters here as much as the separation. A family member holding non-voting shares participates in the money without acquiring a say in how the business is run, which is what almost every owner actually wants when they put a spouse on the register.

Class A, B and C Shares in a Canadian Corporation

The lettering is convention rather than law. There is no statutory meaning to a Class A share, and the rights are whatever the articles say they are. What follows is the pattern we see most often and the one that causes the fewest problems later.

Class A is voting, participating common, held by the people running the business. This is the control block and it is where the lifetime capital gains exemption normally attaches on a sale.

Class B is non-voting, participating common, held by a family member or a second group. Same economics, no say in decisions, its own dividend entitlement.

Class C is a second non-voting common class, so that two family members can be paid different amounts in the same year.

Class D is non-voting common held by a holding company, which is the class that lets profits move up to the holdco free of tax under section 112 where the corporations are connected.

Class E is preferred, for an investor, carrying a defined return and a priority on a wind-up without voting control.

Class F is a redeemable retractable preferred, fixed in value. Nobody holds it at incorporation. It exists because an estate freeze needs it, and creating it in ten years costs a filing fee and a legal bill that authorizing it now does not.

Authorized Share Capital in an Ontario Incorporation

Two words here get confused constantly, and the confusion costs people money.

Authorized means the classes and the maximum number of shares the articles permit the corporation to issue. Issued means the shares actually in somebody’s hands. Authorizing an unlimited number of six classes does not give anybody anything and does not dilute anyone by a single per cent.

Both the Ontario Business Corporations Act and the Canada Business Corporations Act allow an unlimited number of shares to be authorized, which is what we normally recommend. There is no filing fee attached to the number, and a ceiling only creates a future problem when the corporation wants to issue past it.

The practical point is that authorizing classes is free at incorporation and costs money afterwards. Adding a class later means Articles of Amendment, a government filing fee, and legal work on the drafting and the resolutions. Where existing shares have to move into the new class, it means a section 86 or section 51 exchange as well, and that is a reorganisation with a real bill attached.

So the guidance is simple and it runs against most people’s instinct: authorize more than you need. The cost is a slightly longer schedule attached to the articles.

Voting vs Non-Voting Shares in a Small Business

Voting shares decide who runs the corporation. Directors are elected by the voting shareholders, and the directors appoint the officers and make the decisions.

The thresholds that matter are fifty per cent plus one for an ordinary resolution, which includes electing and removing directors, and two thirds for a special resolution, which includes amending the articles, amalgamating, continuing into another jurisdiction and selling substantially all of the assets.

Those numbers have consequences people do not think through at the incorporation stage. A fifty-fifty split between two founders means neither can pass an ordinary resolution without the other. That is not balance, it is deadlock, and when the relationship deteriorates the corporation cannot elect a board or approve anything. The statutory remedies exist but they run through a court.

A sixty-forty split gives one founder operational control and leaves the minority with the statutory protections, including the oppression remedy and dissent rights on certain fundamental changes. A sixty-seven thirty-three split gives the majority the ability to pass special resolutions alone, which is a materially different thing again.

None of this is a reason to avoid an even split where it reflects the deal. It is a reason to have a shareholder agreement with a deadlock mechanism where you do.

Share Structure for a Family Corporation in Ontario and TOSI

The tax on split income in section 120.4 is what stopped income splitting being the straightforward planning it once was, and any structure involving family shareholders has to be built with it in mind rather than around it.

TOSI taxes split income received by a specified individual at the top marginal rate, with no personal credits other than the dividend tax credit. The effect is that the dividend is taxed as though the recipient were already at the top bracket, which removes the entire point of paying it to them.

It applies unless an exclusion does. Three matter in practice.

The excluded business test asks whether the individual was actively engaged on a regular, continuous and substantial basis in the business, in the year or in any five prior years. Twenty hours a week during the operating season is deemed to meet it. This is the cleanest exclusion and it is the reason a spouse who genuinely works in the business is in a far better position than one who does not.

The excluded shares test is the one people reach for where the family member does not work in the business. It requires the individual to hold shares carrying at least ten per cent of the votes and ten per cent of the value, that the corporation earns less than ninety per cent of its income from services, that it is not a professional corporation, and that the individual is seventeen or older. The services condition is the one that fails most often, and it fails silently, because a consultancy or a clinic can be well inside ninety per cent without anyone noticing.

There is also an exclusion where the individual is the spouse of an owner aged sixty-five or over. That is a planning point for later rather than now, but it is a reason to have the spouse on the register early rather than trying to put them there at sixty-four.

Two structural points follow. Ten per cent of votes and value means a spouse holding ten nominal non-voting shares does not qualify for excluded shares, so where that test is the plan, the class and the holding have to be built for it. And none of this is assumable. The tests are applied on the facts each year, and they should be reviewed with an advisor rather than assumed to hold because they held once.

The Lifetime Capital Gains Exemption and Why It Is Decided Now

On a sale of qualified small business corporation shares, an individual can shelter a substantial capital gain from tax under section 110.6. It is the single largest tax benefit available to a Canadian business owner, and it is lost through structure more often than through anything else.

Three tests have to be met. At the moment of sale, substantially all of the corporation’s assets, read as ninety per cent or more by value, must be used in an active business carried on primarily in Canada. Throughout the twenty-four months before the sale, more than fifty per cent of the assets must have been so used. And the shares must have been held by the seller or a person related to them throughout those twenty-four months.

The first test is where deals fail. A profitable corporation accumulates cash and investments, and cash sitting in the operating company is not an active business asset. A corporation with a third of its balance sheet in a portfolio does not qualify, and the problem is usually discovered when a buyer’s advisor points it out weeks before closing. Purifying at that point is possible but it is rushed, expensive and sometimes impossible within the timeline.

That is the practical reason for the holding company class. Moving surplus cash up to a holdco by dividend keeps the operating company clean, and it keeps the exemption available without anybody having to think about it in the year of sale.

The twenty-four month holding period is the other reason this is an incorporation decision. Shares issued to a spouse a month before a sale do not qualify. Shares issued at incorporation have been held for years by the time it matters.

Multiplying the exemption across a family is possible where each person holds shares personally and each meets the tests. It is one of the largest planning opportunities in a private company, and it is set up at the start or not at all.

Where a Holding Company Fits

A holding company sits above the operating company and holds shares in it. Dividends flow up from the opco to the holdco without tax under section 112 where the two are connected, and the cash then sits outside the reach of the operating company’s creditors.

Three reasons to have one. Creditor protection, because money in the holdco is not exposed to a claim against the trading business. Exemption purity, as above. And flexibility on a sale, because the holdco can hold the proceeds and reinvest them.

One reason not to have one at the start, which is that it doubles the corporate filings and the accounting. For a business turning over very little, that cost outweighs the benefit for the first year or two.

The compromise we usually recommend is to authorize the holding company class at incorporation and put the holdco in when the business is generating surplus cash. Authorizing the class costs nothing. Putting the structure in later without that class means a reorganisation.

Where the holdco goes in after the fact, it is done by a section 85 rollover, exchanging founder shares for holdco shares at elected amounts so that no gain is triggered. It works well and it is not cheap, which is the argument for anticipating it.

One caution. Shares held by a holding company do not carry the lifetime capital gains exemption, because the exemption is personal to an individual. A structure that puts every founder share into a holdco has quietly given it up. The usual answer is founders holding their operating company shares personally and the holdco holding a separate class.

What a Wrong Structure Costs to Fix

The cheapest fix is adding a class where no existing shares have to move. Articles of Amendment, a government filing fee, and legal work on the drafting and the resolutions.

The middle case is a share exchange, where existing shareholders have to move from one class to another. That is a section 86 or section 51 reorganisation, and it needs the exchange documented properly so that no disposition at fair market value is triggered.

The expensive case is a structure that has to be unwound after value has accrued. Moving shares between people is a disposition at fair market value, and where the corporation is worth a million dollars, moving twenty per cent of it creates a two hundred thousand dollar gain in somebody’s hands. That is not a filing fee problem.

None of these are disasters. They are all fixable. They are simply expensive compared to getting the schedule attached to the articles right in the first place, which is the point of doing this exercise before the incorporation rather than after it.

What We Do and What Your Lawyer Does

The articles are a legal document and a lawyer prepares them. What we do is decide what should be in them.

That means working out the classes from where the business is going rather than where it is, checking the exemption tests are achievable, testing the TOSI position for each proposed family shareholder honestly rather than optimistically, setting the founder split against the resolution thresholds, and writing the whole thing up as instructions your lawyer can draft from.

We then review the draft articles before filing, because a class drafted without the tax purpose in mind is a common and avoidable problem.

The fee is fixed and includes HST, set once we have had the conversation about the next five years. Payment is by Interac e-Transfer to info@gondaliyacpa.ca, with the security question set to Not Applicable because auto-deposit is enabled.

What This Calculator Does Not Cover

It does not draft articles, and it does not replace a lawyer. It produces a starting point to take to one.

It does not price the incorporation itself, the NUANS name search, the minute book, or the shareholder agreement, all of which are separate.

It does not model a family trust, which is a common holder of a growth class in a larger structure and which brings its own rules, including the twenty-one year deemed disposition.

It does not deal with the restrictions a professional body places on who may hold shares of a professional corporation, which vary by profession and which override anything the tax planning would otherwise suggest.

And it does not confirm that any TOSI exclusion or exemption test is met. Those are questions of fact, they are tested every year, and they should be examined on your own circumstances before anything is filed.