Tax Question:

Why should you be concerned about participating and non-participating shares in your company?

Facts:

Shares in a corporation can be participating or non-participating, among other features. Participating shares are eligible to “participateÓ in the equity growth of the company and be permitted to receive dividends. Non-participating shares do not benefit from the equity growth of the company. This can potentially impact the valuation of shares.

Discussion:

Private companies commonly issue multiple classes of shares to different members of the family to maximize income splitting potential. Generally, the family members that operate the company will receive all or more of the voting shares and the non-active family members will receive mostly non-voting shares. This way all family members have access to the profits of the company, but the control of the company is retained by the active shareholders and generally, the financial risk to the non-active shareholders is limited to the cost of their shares. Voting is different from participation in profits. Participating in profits is an attribute of a share and that attribute can be given to voting shares or to non-voting shares. So you can have:

  • voting participating;
  • voting non-participating;
  • non-voting participating; and
  • non-voting non-participating.

If a company has issued different classes of shares with different attributes (i.e. some are voting and some are participating), it can make the classes of shares have different values. Voting shares are generally considered to have value because they can impact the future of the company. But participating shares also can have value because they receive the profits. This mix of voting and participating rights can create confusion for tax purposes. This is important when dealing with the lifetime capital gains exemption (LCGE). If a company was sold resulting in a significant gain, the allocation of the sale price to the various shares could create both opportunities to spread the wealth and thus the tax amongst the shareholders, but as well create contention with the Canada Revenue Agency about which shares actually have the value. This can be particularly important to the seller of the shares if they hope to use tax savings tools like the lifetime capital gains exemption.


If you would like more information on this topic, please contact a member of the EPR Maple Ridge Langley team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. EPR Maple Ridge Langley, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.


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