Preferred Shares vs Common Shares

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Tax Question:

What are preferred shares and how do they differ from common shares?

Facts:

Preferred shares are special shares with different rights and restrictions than those of common shares.

Discussion:

Not all shares have the same rights and restrictions.

Preferred shares are often issued during a corporate re-organization and may have been issued in exchange for property. They may also have been issued as a part of a retirement strategy for the founding owner. Or they may have been issued to a silent partner in exchange for his investment in the company. In each of these cases, the preferred shares have likely been specifically assigned different rights and restrictions than those of the common shares.

Preferred shares often do not have voting rights. They may be issued to silent partners or the partner who is retiring as a way of ensuring value of the investment which can be cashed out at a later date.

They may have set terms of interest resulting in annual dividends and a regular income flow for the shareholder. They may have set redemption rights stipulating when they can be redeemed and how much the preferred shares are to be redeemed for. The preferred shares may also have special rights in that they must be redeemed before any of the common shares or that they receive dividends before any of the common shares.

It is common to use different share types to differentiate between participating and non-participating shareholders or to structure the flow of after tax profits.

Dawn Loeffler, BA (Hons), CPA, CA
Manager, Gilmour Group CPA’s
Email: faqs@gilmour.ca
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