Same Class of Shares
When shareholders each hold the same class of shares, any dividends (a common way to distribute income generated by the corporation) paid to those shareholders must be split in accordance with the number of shares held.
If a corporation issues 60 Class A Common Voting shares to the first shareholder, and 40 Class A Common Voting shares to the second shareholder, all dividends paid by the corporation must be split 60/40.
Different Class of Shares
If on the other hand, each of the shareholders holds a different class of shares, dividends may be declared by the corporation in whatever proportion the directors determine from time to time.
If a corporation issues 60 Class A Common Voting shares to the first shareholder, and 40 Class B Common Voting shares to the second shareholder (meaning each shareholder would hold a different class of shares), the directors of the corporation could decide to split dividends in different proportions (such as 50/50, 80/20, or 0/100) subject to any tax restrictions on income splitting.
Issuing a separate class of shares to each shareholder can therefore provide additional flexibility to the corporation when it comes to distributing income. This is often recommended for tax purposes, especially for small corporations that are owned by family members.
There are certain corporate decisions that by law require a vote to be held by the shareholders in order to be approved. These include important decisions such as winding-up the business of the corporation, selling all or substantially all of the corporation's assets, and amalgamating the corporation with another entity. When these decisions are being made, each class of shareholders is entitled to a separate vote on the decision. In other words, the holders of Class A shares in the second example above would be required to approve the decision, as would the holders of Class B shares (in a separate vote). In these cases, having each shareholder hold a separate class of shares can provide minority shareholders with a greater degree of control than they would otherwise have.
As a general rule, issuing different classes of share to each shareholder is used most often by corporations owned by people with a high level of trust, such as a corporation owned by two spouses. When dividends are being declared, the directors of the corporation can simply decide how the money is to be distributed, after taking into account each shareholder's financial and tax position.
Where there is not a close relationship of trust, or if there is no need to retain flexibility over the amount of dividends declared to each shareholder, it is most common for the shareholders to hold the same class of shares. This means that the dividends will therefore be split in accordance with the number of shares held, rather than changing from time to time as determined by the directors. Votes on major decisions will also not require a separate vote for each class but instead be determined on the basis of the total number of shares held by each shareholder.
If you require more information in this regard before proceeding, we recommend booking a consultation with a lawyer, in which case we recommend saving this form for later. You can book a consultation with an Alberta business lawyer by clicking here.
You may also wish to speak with your accountant to determine whether the "dividend sprinkling" described above is a viable option for your business. In some cases, and for certain business types, it may be restricted, making the issuance of separate classes of shares less important.