Common vs Preferred Shares in Canada: Founder Guide

Search "common vs preferred shares" and almost everything you find is written for stock-market investors: dividend yields, interest-rate sensitivity, whether preferreds behave like bonds. That is a different question from the one founders are asking, which is what to put in the share structure section of their articles. This guide answers the founder version.

What is the difference between common and preferred shares?

Common shares carry the vote, a discretionary dividend and everything left over if the corporation is wound up. Preferred shares usually trade the vote and the upside for priority: they get paid before common shares, both on dividends and on the return of capital. One class carries the risk and the growth, the other carries the ranking.

Here is the part almost no article says out loud: "preferred" is not a legal category. Neither the federal nor the Quebec corporations statute defines a preferred share. Your articles create the preference, word by word. Two corporations can both have "Class C preferred shares" with almost opposite rights, so never trust the label alone on someone else's cap table.

Why would a corporation issue preferred shares?

In a private Canadian corporation, preferred shares are rarely about raising money. They are a structuring tool, and four uses dominate.

The estate freeze is the best known. The founder exchanges common shares for redeemable preferreds frozen at today's fair market value, and new common shares go to the successor or a family trust so they capture all future growth. The tax mechanism sits in section 86 of the Income Tax Act, which allows an exchange of shares during a reorganization of capital without an immediate taxable disposition.

Differentiated dividends deserve a caution. Because the board declares dividends class by class, separate classes let different shareholders receive different amounts in the same year. Tax on split income rules now restrict that flexibility heavily between family members, so this is planning to do with an accountant, not a workaround to improvise.

What is the downside of preferred shares?

Priority is not protection. A preferred shareholder ranks ahead of common shareholders but behind every creditor, which in a failing small corporation usually means nothing is left either way.

Three more limits are worth knowing before you issue any:

• A priority dividend is not a guaranteed dividend. The board still has to declare it, and it cannot legally do so when the solvency tests fail. Cumulative preferreds only mean the unpaid amount accrues and must be cleared before any common dividend.
• No vote means no influence. Unless your articles say otherwise, a preferred shareholder cannot vote on directors, on a sale of the business or on most decisions affecting their own shares.
• The upside is capped by design. If the corporation triples in value, frozen preferreds are still worth their redemption price. That is the point of a freeze, but a real cost when the freeze happens too early.

What do Class A, B and C shares mean in your articles?

Nothing on their own. The letters have no legal meaning. A Class A share is not automatically common, and Class C is not automatically preferred. The real content lives in the schedule of rights, privileges, restrictions and conditions attached to each class.

That said, Canadian counsel reuse fairly standard patterns. A typical founder structure looks like this.

Authorizing classes costs nothing extra at incorporation. Adding one later requires articles of amendment, a special resolution and a fee, which is why most Canadian structures authorize four to six classes on day one.

What does Canadian corporate law actually require?

Your share capital must include shares carrying three rights: voting at any meeting of shareholders, receiving any dividend the corporation declares, and receiving the remaining property on dissolution. Those rights do not have to sit on the same class, but each must be attached to at least one class.

That is subsection 24(3) and (4) of the Canada Business Corporations Act federally and article 47 of Quebec's Business Corporations Act provincially. Corporations Canada adds that there is no limit on how many classes your articles may create.

Two defaults catch founders off guard. Unless the articles say otherwise, every share carries all three rights, so a class labelled "preferred" with no drafted preference is legally just a common share. And if no issued share carries one of those rights, a restriction on it has no effect, so a corporation that only issued non-voting preferreds would end up with voting shareholders anyway.

One jurisdictional difference is worth flagging: federal shares must be issued without nominal or par value, while Quebec allows par-value shares, no-par-value shares, or both.

Who gets paid first if the corporation winds up?

Creditors first, without exception. Then the return of capital on preferred shares, in the order of priority set out in the articles. Common shares receive only the residue. When assets are thin, common shareholders receiving nothing is the normal outcome.

The same ranking logic governs money leaving during the corporation's life, but through solvency tests rather than a queue. Federally, a corporation cannot declare a dividend if there are reasonable grounds to believe it could not pay its liabilities as they come due, or if the realizable value of its assets would fall below its liabilities plus the stated capital of all classes. Quebec applies the liquidity test alone. Redemptions carry a similar restriction.

So a redeemable preferred share is not a promissory note. If the corporation lacks the cash, the redemption cannot be paid, no matter what the articles say.

How much does it cost to add or change a class of shares?

Official fees in effect in August 2026 and subject to change. Confirm current amounts with Corporations Canada and the Registraire des entreprises du Québec before you budget.

Those figures exclude professional fees and argue for getting the structure right during incorporation rather than fixing it later.

Are private-company preferred shares the same as the ones on the stock market?

No, and confusing the two is the most common mistake founders make here. Listed preferred shares are issued by large public corporations, pay a stated yield, trade on a liquid market and are analyzed against bonds. That is a genuine asset class.

Your private corporation's preferred shares have no market, no quoted price and no buyer other than the corporation itself. Their value is the redemption price written in your articles. They are an ownership-structure tool, not an investment product. That is also why a shareholders' agreement matters as much as the articles: the articles fix the rights attached to the shares, the agreement fixes what the people owe each other.

Frequently asked questions

Is it better to hold common or preferred shares in a private corporation? It depends on your role. If you build the business and want the upside and the control, hold common. If you want a predictable return, a fixed value or an exit that has already been priced, hold preferred. Founders almost always hold common shares.

Can a preferred share carry a vote? Yes. Nothing prevents it, and your schedule of rights decides. A frequent design gives preferred holders voting rights only if the priority dividend goes unpaid for a set number of years, which hands them leverage at the exact moment they need it.

How do preferred shares work in Canada if the corporation is sold? The purchase price is allocated according to the articles. Preferred shares are usually satisfied at their redemption or stated amount, and common shares split whatever remains. That is why the drafting of the schedule matters far more than the class letter.

Can I convert common shares into preferred shares later? Yes, through a reorganization of capital and articles of amendment approved by special resolution. That is the core of an estate freeze. The tax consequences are significant, so plan the exchange with a tax specialist before filing anything with the registry.

How many classes should I authorize at incorporation? Four to six is a common Canadian pattern. Authorizing a class never obliges you to issue it, while adding one later costs roughly $200 in filing fees plus professional fees and a shareholder vote. Authorizing broadly and issuing narrowly is almost always the cheaper path.

Get your share structure right on day one

The expensive mistake is incorporating with a single class of common shares "to keep it simple", then paying for articles of amendment eighteen months later when an investor, a spouse or a succession plan arrives. The cheap version: authorize several classes at the start, issue only what you need today.

Lexstart handles the full incorporation, including the articles and the schedule of share classes, plus the corporate records and organizational resolutions. See our pricing, read our guide to shareholder rights in Quebec, or reach us through our contact page.