Share Class Basics: How Creating Multiple Share Classes Can Help in Income Splitting — CPA Firm Near You, Montreal

Introduction

Many Quebec small business owners incorporate using only one class of shares, not realizing the lost tax-planning flexibility. Creating multiple share classes allows strategic income splitting, dividend flexibility, estate planning, bringing in investors, and controlling voting rights. However, it must be done correctly to comply with the Tax on Split Income (TOSI) rules and avoid CRA challenges. This guide explains how multiple share classes work, why they matter, and how a CPA near you in Montreal can help structure them properly.

Legal and Regulatory Framework

Under the Canada Business Corporations Act (CBCA) and the Quebec Business Corporations Act (QBCA), corporations may create different classes of shares with various attributes: voting or non-voting, participating or non-participating, redeemable, retractable, cumulative or non-cumulative dividends, and fixed-value preferred shares. The Income Tax Act governs how dividends are taxed, especially with TOSI rules limiting income splitting among family members. Creating or amending share classes requires updating articles of incorporation, drafting resolutions, and modifying corporate registers and minute books. CRA requires that share structures reflect commercial intent and comply with attribution rules.

Key Court Decisions

Courts have ruled that improper income splitting through share classes will be denied when TOSI applies or when share structures are artificial. Judges have confirmed that dividends paid to family members must align with their contribution to the business unless exemptions apply (such as excluded business or excluded shares). Some decisions have denied benefits when share attributes were not respected or when minute books were incomplete. Courts emphasize that share structures must match economic reality and legal documentation.

Why CRA and Revenu Québec Scrutinize Share Classes

Multiple share classes attract CRA attention because they are often used for income splitting, estate freezes, and reorganizations. CRA reviews whether dividends are reasonable, whether family members actually contribute to the business, whether TOSI applies, and whether share rights are properly documented. Revenu Québec examines compliance with QBCA rules, share transfers, valuation, and corporate records. Poorly documented structures increase audit risk and can invalidate tax planning.

Types of Share Classes and Their Uses

Common shares

Participate in growth and receive dividends; often held by founders.

Preferred shares

Used for freezes, fixed-value ownership, or bringing in investors.

Non-voting shares

Allow dividend allocation without transferring control.

Voting shares

Used to maintain control while allocating economic rights separately.

Growth shares

Issued to children, family trusts, or investors for future appreciation.

Redeemable/retractable shares

Allow planned buyouts or redemptions without triggering transfers.

Income Splitting and TOSI Considerations

Income splitting is only allowed when it meets exemptions under the Tax on Split Income rules. Exemptions include excluded business, excluded shares (for certain corporations), spouse age 65+ rules, or reasonable dividends based on labour or capital contribution. Share classes enable strategic allocations but must comply with TOSI to avoid punitive tax rates.

How to Create or Modify Share Classes

Step 1: Review existing corporate structure

A CPA analyzes current share classes, registers, and minute books.

Step 2: Amend articles of incorporation

New share classes must be legally created through corporate amendments.

Step 3: Draft resolutions and update records

All corporate registers and share certificates must reflect changes.

Step 4: Issue or exchange shares

Shares are issued to family members, trusts, or investors as part of the plan.

Step 5: Ensure compliance with TOSI

Dividend strategies must follow rules to avoid penalties.

Step 6: Integrate share classes into long-term tax planning

Share classes support freezes, reorganizations, and succession strategies.

Common Pitfalls

Ignoring TOSI rules

Dividends to non-active family members can be taxed at high punitive rates.

Missing documentation

Share classes not documented in articles or minute books may be invalid.

Overusing non-voting shares

Without planning, this can weaken corporate control.

Incorrect valuations

Growth shares or freeze shares must reflect fair market value.

No strategic plan

Creating share classes without a long-term tax strategy reduces their benefit.

Mackisen Strategy

At Mackisen CPA Montreal, we design and implement customized share structures for income splitting, freezes, corporate reorganizations, and investor onboarding. We amend corporate articles, prepare resolutions, maintain minute books, coordinate valuations, and ensure compliance with TOSI and other tax rules. Our planning integrates both current and future tax minimization.

Real Client Experience

A Montreal corporation issued dividends to adult children through non-voting shares, but TOSI applied. We restructured the share classes and documented excluded-business status to avoid punitive taxation. Another client needed growth shares for a trust during an estate freeze; we designed multiple share classes and updated articles and registers.

Common Questions

Can multiple share classes help reduce taxes?

Yes, but only when structured to comply with TOSI rules.

Do I need a lawyer to amend share classes?

A CPA prepares the tax structure; a lawyer files the amendment.

Can I convert existing shares to new classes?

Yes, often using Section 86 reorganizations.

Are non-voting shares useful?

Yes, for giving economic rights without giving control.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal creates share structures that support income splitting, succession planning, and long-term tax strategy while ensuring compliance with federal and Quebec rules. We design tax-efficient corporate frameworks that grow with your family and business.