The Concerns About Participating And Non-Participating Shares In Your Company

Grant Gilmour

Shares in a corporation can be participating or non-participating, among other features. Participating shares are eligible to “participate” in the equity growth of the company and be permitted to receive dividends. Non-participating shares do not benefit from the equity growth of the company. This can potentially impact the valuation of shares.



Private companies commonly issue multiple classes of shares to different members of the family to maximize income splitting potential. Generally, the family members that operate the company will receive voting shares and the non-active family members will receive non-voting shares. This way all family members have access to the profits of the company, but the control of the company is retained by the active shareholders and generally the financial risk to the non-active shareholders is limited to the cost of their shares. Voting is different from participation in profits.

Participating in profits is an attribute of a share that can be given to voting or non-voting shares. So you can have:

  • Voting participating
  • Voting non-participating
  • Non-voting participating
  • Non-voting non-participating

If a company has issued different classes of shares with different attributes (i.e. some are voting and some are participating), it can make the classes of shares have different values. Voting shares are generally considered to have value because they can impact the future of the company. But participating shares also can have value because they receive the profits.

This mix of voting and participating rights can create confusion for tax purposes. This is important when dealing with the Lifetime Capital Gains Exemption (LCGE). If a company was sold resulting in a significant gain, the allocation of the sale price to the various shares could create both opportunities to spread the wealth and thus the tax among the shareholders, but as well create contention with the Canada Revenue Agency about which shares actually have the value. This can be particularly important to the seller of the shares if they hope to use tax savings tools like the lifetime capital gains exemption.

The post was created by Grant Gilmour.

Grant has been in the CA business since 1988, starting his own practice in 1994. His tax expertise encompasses tax planning, international tax issues, and Scientific Research and Development tax credits. He is a graduate of the CICA In-Depth Tax Course and in 2012, Grant received the CA Community Service Award and the Scout Leader Medal.

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