Incorporating in Canada 4: Submitting Articles of Incorporation and Deciding Share Provision Structure

This post is part of a series on my story incorporating in Canada.

Armed with the name pre-approval or even just a NUANS Name Search report (or neither if you are going for a numbered corporation), it is time to start the incorporation registration. Head over to the federal online system. Before clicking on incorporate I suggest some very important reads.

Important Readings

These two are MUST reads if you want to get a strong understanding of the process. Or of course you could pay a lawyer who has paid attention to all these things to do it for you.

Disclaimer

I am not your lawyer nor accountant. This process has some “lawyery” lingo in it, and it is meant as a summary of what I learned.

Important Pointers

The online descriptions and the guides I mentioned before should be clear enough, but there are some pointers I would like to point out. One of the main things that the Articles of Incorporation detail is the share structure, so make sure you understand what you are doing. The online service gives a few basic templates, however we found them to be inadequate for our purposes. Here was our thought process:

Structuring Share Provisions

Before structuring we should be aware that each share can have these three rights:

the right to vote
the right to receive dividends (if the board of directors has declared any); and
the right to receive the remaining property of the corporation after it is dissolved.

Basically you can declare any number of classes of shares with whatever rights you want of those three.

Different Classes for Each Founder

In the case of having more than one founder one class of shares that has all the rights could be declared and divided between the founders. However, this may cause some limitations in the future. For example let’s say that I wanted to get my money from the corporation in the form of a salary while as another partner wants it in the form of dividends. How would we be able to do that if we have only one class? Whatever dividends the directors assign to a class of shares must be given to all shares of that class. To fix this issue one class of shares (that has all three rights) per founder should be declared. That way, each founder has his class of shares. I can get the salary and no dividend while as the partner can get the dividend but no salary. It is a good idea to make some more classes with all three rights in case more primary owners are added to the company, besides it doesn’t cost anything to declare some extra share classes.

Income Splitting

Another thing you may want to do is make use of income splitting, as explained in The Law Society of Upper Canada’s post: How to Structure the Share Provisions of a Corporation. You can declare many classes that only have the right to receive dividends. To maintain control of the company you may stipulate that the directors can take away those shares at their discretion. This gives the controlling owners power over who to split the income with.

Classes for Investors

It’s probably a good idea to have some classes ready for investors. These vary, but the general gist is they don’t have the right to vote and they may have a priority with regards to receiving dividends.

Shares Clauses Example

Here is an example:

Declaring all share classes

First we declare all the share classes, in this example we make A-J. You can have as many as you want.

The Corporation is authorized to issue an unlimited number of shares of the following designations: Class A Shares, Class B Shares, Class C Shares, Class D Shares, Class E Shares, Class F Shares, Class G Shares, Class H Shares, Class I Shares, Class J Shares with the following rights, privileges, restrictions and conditions:

Specifying Rights of Controlling Shares

These are the shares that you want the controlling partners to hold, hence they have full rights.

Class A Shares, Class B Shares, which shall carry the right:

a. to vote at all meetings of shareholders; and
b. to receive the remaining property of the corporation upon dissolution; and
c. to receive the dividends in such amount and at such time and place as the directors of the corporation may determine.

Specifying rights of Shares for Income Splitting

You want to have several shares here to be used for income splitting if the need arises. Might as well make some extra since it doesn’t cost you anything.

Class C, Class D, Class E Shares, Class F Shares, Class G Shares, Class H Shares which shall carry the right:

a. to receive the dividends in such amount and at such time and place as the directors of the corporation may determine.

Defining Controlling and Special Shares (income splitting)

To make things easier we can say this so we don’t have to repeat the class names.

Henceforth “Controlling Shares” shall refer to the following designations: Class A Shares and Class B Shares.

Henceforth “Special Shares” shall refer to the following designations: Class C, Class D, Class E Shares, Class F Shares, Class G Shares and Class H Shares.

Specifying the redeemability of Special Shares (Income Splitting)

As mentioned previously, the controlling members will want to be able to control the income splitting shares, so their redeemability should be set out clearly.

Special Shares are redeemable as follows:

i. The directors may determine, at any time and from time to time, to redeem the whole or any part of the then outstanding Special Shares (such share or shares are referred to as the “Redeemed Share” or “Redeemed Shares” as the case may be);
ii. The procedure for such redemption, including the giving of notice, if any, shall be determined by the directors, acting reasonably;
iii. The Special Shares may be redeemed either on a pro-rata basis or otherwise;
iv. The said Special Shares or any part thereof shall be redeemable at the option of the corporation without the consent of the holders thereof at a price equal to the amount paid per share plus any declared and unpaid dividend.

the aggregate redemption price is referred to, in the case of each registeredholder, as the “Redemption Amount”;

v. On or after the date specified for redemption (the “Redemption Date”) the registered holders of the Redeemed Shares shall be entitled to payment of the Redemption Amount on presentation and surrender at the Corporation’s registered office or other place designated by the directors in the notice of redemption, of certificates for the Redeemed Shares, endorsed for transfer to the Corporation;
vi. If less than all of the Special Shares represented by any certificate are redeemed, the registered holder shall be entitled to receive a new certificate for the number of shares represented by the original certificate which are not redeemed;
vii. From and after the Redemption Date, the holders of the Redeemed Shares shall cease to be entitled to dividends and shall not be entitled to exercise any of the rights of shareholders in respect of the Redeemed Shares unless the Corporation has defaulted on payment of the Redemption Amount.

Specifying fixed-rate dividend and non-fixed-rate dividend shares for investors

Finally, you may want to specify some shares for the sake of investors. Here are two types:

Class I Shares which shall carry the right:

a. to a dividend as fixed by the board of directors and
b. upon the liquidation or winding-up of the corporation, to repayment of the amount paid for such share (plus any declared and unpaid dividends) in priority to the Controlling Shares, but they shall not confer a right to any further participation in profits or assets.

The holders of Class I Shares shall not be entitled to vote at meetings of shareholders except as otherwise specifically provided in the Canada Business Corporations Act.

Class J Shares which shall carry the right

a. to receive the dividends in such amount and at such time and place as the directors of the corporation may determine.
b. upon the liquidation or winding-up of the corporation, to repayment of the amount paid for such share (plus any declared and unpaid dividends) in priority to the Controlling Shares, but they shall not confer a right to any further participation in profits or assets.

The holders of Class J shares shall not be entitled to vote at meetings of shareholders except as otherwise specifically provided in the Canada Business Corporations Act.

Avoiding Being Designated as a Distributing Corporation (Public)

There are some provisions that you must declare to avoid being considered a distributing (public) corporation.

As the Corporations Canada Guide Mentions:

For your corporation to avoid being designated as a reporting issuer under provincial securities legislation and consequently as a distributing corporation under the CBCA, you must include in your Articles of Incorporation a statement that restricts the transfer of the corporation’s securities without the consent of the majority of the directors or shareholders. Distributing corporations must comply with the registration and prospectus filing requirements and other related procedures set out in the CBCA and in provincial/territorial securities law.

To restrict the transfer of shares, you should include the following statements in your Articles of Incorporation:

at the item entitled â€œRestrictions on shares transfersâ€ â€” a statement restricting the transfer of the corporation’s shares; and

at the item entitled â€œOther provisionsâ€ â€” a statement restricting the transfer of the corporation’s securities.

If you later decide to offer shares publicly, you will have to remove these restrictions by submitting Articles of Amendment and paying the $200 filing fee. All previous share issuances would remain valid, however, because your corporation would not have been subject to the registration and prospectus requirements under securities law.