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Do all shareholders have to be paid equal amounts of dividends?

Expert: Michael Fromstein

Gabrielle asked:

If there are three shareholders in a limited company and we want to pay dividends to clear out a debit balance in their shareholder accounts, do all the shareholders have to be paid equal amounts of dividends? Our lawyer told us this is the case. Is he right or does it only apply to public companies?

Michael Fromstein answered:

The lawyer is absolutely right that there is no difference between private companies and public companies in most respects like this. Each share has the same characteristics so if one shareholder gets $2 of dividend on one Class A share, then each shareholder must get $2 of dividends on each Class A share.

Therefore, if in the reader's case, each shareholder had the same number of the same class of shares, then each shareholder would have to get the same amount of dividends on those same shares. The usual way around this is to ensure that different types of shareholders have different classes of shares. The different classes, whether in public companies or private companies get treated differently. Just read about the Magna shares and payments to get rid of the family shares to understand how that works in public companies.

For example, if one shareholder works in the business and the other provides capital but the business is not making a profit, the "working shareholder" might want dividends subject to lower tax than salaries. To do that, maybe both shareholders have 100 common shares but the working shareholder has 50 Class W shares (W for working). The shareholders can agree to pay that shareholder $x on his 50 Class W shares, with no shareholders of other shares getting anything (the corporate articles can either permit or prevent such preferences).

You can't change anything retroactively. To change shareholdings now assuming the corporation has business activity would require a valuation of the business and drafting articles of amendment to authorize the flexibility of multiple classes of shares. Depending on whether or not this is a one-year problem or will be ongoing, it might be cheaper to pay some taxes rather than all the professional fees. If it will continue, the professional fees might be cheaper.

About the author

Michael Fromstein is a tax specialist with Integrated Professional Specialist Services.

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