I am seeking advice on how to accurately report different share classes for dividend compensation in the context of a client company’s structure. The company has two shareholders, X and Y, each holding 50% of the Class A shares. Additionally, Mr. Y holds 100% of the non-voting Class B shares, reflecting his role in managing the company. The shareholders intend to compensate Mr. Y through dividend payments.
My question is: How should the share classes be reported in Section 50 of the T2 Corporate Income Tax Return and in the T5 Statement of Investment Income issuances? Specifically, I am looking for guidance on reporting dividend payments to Mr. Y, given his dual shareholdings in Class A (voting) and Class B (non-voting) shares.
On schedule 50, enter the S/H name, SIN, and % of common and pfd owned. Two lines only, one for each S/H. Y had 2 entries on the same line, 50% of common and 100% pfd. That’s all the sch.2 requires. Sch.3 reports total dividends paid, with eligible dividends shown so that various other schedules are populated correctly. For the T5, report total dividends paid to each S/H, remembering to report eligible and other than eligible in their respective boxes. No differentiation between common and pfd.
Not understand why you put Y’s Class B non-voting shares on the “Percentage Preferred Shares” column on Schedule 50. Y is not holding Preferred Shares.
@lokki
If they are “non-voting” shares they can’t be common shares. They are likely a class of special shares or preference shares. The Articles of incorporation would accurately describe the shares, along with their rights & restrictions.
EDIT I stand corrected @lokki and @ditmc. Thanks for pointing that out. Non-voting shares may be common shares.
I will take a time out and feel some shame.
/EDIT
Non-Voting Common Shares
Non-voting common shares offer financial benefits such as the right to dividends and a share of residual assets upon liquidation. However, they do not provide the holder with a vote in corporate matters. This type of share is often issued to raise capital without relinquishing control of the company.
You would report 25% each on the class A, and 50% on class B for S50 purposes. Accordingly, you would only declare dividend payable on the Class B shares and outline this in your resolution as such. Make sure your date of declaration lines up with the fiscal year end of the company.
For your T5 input, no need to specify the type of shares, just make sure the payee/payor info is correct.
Non-voting stock can be common stock. However, specify if these are actually common, or preferred.
Sorry, I mistakenly assumed the extras were preferred. Now it’s an easier calculation. Since only one class is voting, you report 50% for each of X & Y. I never report non/voting shares. What’s the point?
Doesn’t this shift the company’s ownership to a 25% and 75%? The Class B shares are essentially powerless, devised solely to compensate the party overseeing operations without giving them any extra ownership right.
The ownership attribution is irrelevant, you’re thinking of control. He can theoretically own 99% of the company, but if he has no voting power, he has no control.
During the past 20+ years I have revisited this topic several time. CRA does not seem to have a current definitive administrative policy on how to complete T2 S50. Their aim is to record the top 10 controlling shareholders for compliance, audit, and recovery of taxes owing purposes. This seems to limit shareholders to voting shares only since non-voting shareholder have no control. No clarification on how to handle multiple classes. Recommendation to track shares by type and class with registers and continuity logs.
In 2020 CPA Canada advised members of a T2 Schedule 50 project. This project attempted to use the Schedule 50 to track down controlling shareholders. I am unaware of any externally shared results of this project. In conversing with some senior CRA Businees Enquiries agents it seems that this project has taken a lower priority due to Covid-19 and several other ongoing projects.
Share Registers
…Certificates
…Share continuity by type and class, date, # of shares, value, shareholder
…Shareholder info continuity by name and tax#
…Treasury register by share type and class, date, $ in / $out
Minutes
… Shareholders
… Directors
Shareholder Agreements
… Spells out buyouts, valuation, etc.
For small, private corporations it is the rare few who maintain their corporate record books fully and up to date.
The reality is that CRA isn’t auditing anyone because of an incomplete, incorrect or (even missing!) Sch 50. They haven’t done so AFAIK in the past 40 years and aren’t likely to do so in the next 40 IMO.
Files don’t get rejected if the format is wrong or incomplete.
As long as the Minute Book is accurate, that is the book of record. It would appear that Sch 50 is strictly “informational”. (Especially so as I just went to a client account whose info is correct on the Sch 50 and had her log in to her MyBA…and it had no idea who she is. Clearly a left-hand / right-hand thing at CRA…again.)
Just thinking aloud: Can we issue Class A 100% share to party A and Class B 100% shares to party B. Both shares would have voting rights. This way our ownership is 50:50. Then we declare the dividend only to Class B shareholder (to compensate him for management of the operations). In S50, it will 50% for Party A and 50% for Party B, and we will issue T5 only to Party B. @SmallBizGuy@Deepinthemoneycall@jhd.hemeon@lokki@gaymwise
You’re really overthinking this. If each party has 50/50 of the equity, it’s 50/50 ownership. By giving Class B it;'s voting rights however (given your articles have outlined these rights initially), you have then given the guy a 50% control of the company. Be careful using ownership and control interchangeably, as you may trigger acquisition of control provisions if you structure your clients company incorrectly.
There was nothing materially wrong with your initial structure, you simply declare a dividend on the Class B shares and call it a day.
Agree - set the ownership structure as necessary to accomplish “control” in the proportion that is desired. Issue separate non-voting classes of shares (again, if need be) to split dividend income in manner desired. They are two quite separate issues and need to be considered as such.
Yes, absolutely, but this is generally done at the the time of incorporation, not usually afterwards. In Ontario I increasingly see incorporating shareholders being issued different series of voting common shares specifically so that dividends can be paid to some shareholders but not others.
In your case, it seems shares have already been issued and the class B shares are already in place. As DITHC and SBG have both mentioned, you don’t need to change anything with the share structure. Simply declare dividends on the class B shares.
