Owning a business can be a complicated venture, and understanding how shares work is essential to any business’s success. Shares are not merely financial instruments; they represent a stake in ownership, a vote in decision-making, and a potential source of capital. This blog will act as a guide to understanding the fundamental workings of shares in Ontario business law.
First and foremost, shares are the legal representation of an ownership interest in a corporation. Each share is a fractional part of the ownership interest in the corporation. A share certificate evidences the ownership of a share. Depending on the type of share and the rights associated with such shares, a share can confer rights on the shareholder, which can include:
- a right to a dividend,
- voting rights for any actions that the corporation may make, or
- a right to a share of the assets of the corporation upon a winding-up.
- receive notices of meetings of shareholders, if entitled to voting rights;
- receive information about the corporation, such as annual audited financial statements and minutes for meetings of shareholders; and
- vote on the winding-up and dissolution of the corporation.
The legislation divides shares into “authorized capital” and “issued capital.” Authorized capital refers to the maximum number of shares a company can issue. The Ontario Business Corporations Act requires that any maximum issuance of shares is recorded in the articles of incorporation, along with the conditions that attach to each class of shares if there is more than one. Issued capital is the portion of the authorized capital the company has issued and sold to shareholders. The Ontario Business Corporations Act requires that shares are fully paid for before being issued.
The corporation may have one class of shares or multiple classes of shares.
If the corporation has one class of shares (typically known as common shares), the Ontario Business Corporations Act requires that such shares must rank equally and that all rights prescribed for such shares will be applied to all issued shares (otherwise known as shares ranking pari passu). The legislation requires that these rights include the right to vote at all shareholders’ meetings and to receive property upon the dissolution of the corporation.
If the corporation has more than one class of shares, the Ontario Business Corporations Act requires that the specific rights and obligations attaching to a class be set out in the articles of incorporation. The rights described above can be allocated among one class of shares or another. For example, one class may have the right to vote at a meeting of shareholders, while another class has the right to the corporation’s property upon dissolution.
It is important to review the articles and the legislation to determine whether there are multiple classes of shares and the specific rights assigned to each.
According to the Ontario Business Corporations Act, every corporation must maintain a stated capital account, which is an accounting record of the money it received for issuing shares for each class. If shares are issued for other types of consideration, such as property or past services, the corporation’s directors must determine the amount of money the corporation would have received if the corporation received money for those shares and the value of the property or past services. This amount must then be added to the stated capital account.
The director of a corporation must be familiar with these requirements when issuing shares in a corporation.
“Paid-up capital” is the source of much confusion when determining the tax consequences on the corporation when issuing capital. In accordance with the Income Tax Act, paid-up capital is an amount of money a corporation may return to its shareholders free of income tax. In simple terms, paid-up capital refers to the total amount of money that a company’s shareholders have paid for the shares they own. For example, if a company issues 1,000 shares at $10 per share, and shareholders buy all those shares, the paid-up capital would be $10,000. This is the actual money that the company has received from its shareholders in exchange for the shares they hold.
However, paid-up capital can have tax consequences. For example, on a purchase of a share for cancellation, the amount paid by a corporation to a shareholder for the purchase in excess of the paid-up capital of that share is treated as a deemed dividend, which is generally taxed at a higher level.
The intersection of share ownership and income tax is one of the most critical aspects of understanding how shares work, especially if the issuing corporation is public. The business law team at Bader Law provides comprehensive business organization advice to our clients, including share purchase options, buy-sell arrangements, corporate reorganization and restructuring, and shareholder disputes. We work with our clients to help them determine what legal structure is best suited for their needs in order to reduce liability and maximize income. To speak with one of our lawyers about your business needs, contact us online or call us at 289-652-9092.