{"id":40306,"date":"2025-10-23T14:54:03","date_gmt":"2025-10-23T18:54:03","guid":{"rendered":"https:\/\/www.millerthomson.com\/?p=40306"},"modified":"2025-10-23T14:54:05","modified_gmt":"2025-10-23T18:54:05","slug":"can-common-shares-trigger-part-vi-1-tax-key-risks-hidden-in-shareholder-agreements","status":"publish","type":"post","link":"https:\/\/www.millerthomson.com\/en\/insights\/corporate-tax\/can-common-shares-trigger-part-vi-1-tax-key-risks-hidden-in-shareholder-agreements\/","title":{"rendered":"Can common shares trigger Part\u00a0VI.1 tax? Key risks hidden in shareholder agreements"},"content":{"rendered":"\n<p>Part&nbsp;VI.1 tax under the <em>Income Tax Act<\/em> is often described as a \u201ctrap for the unwary\u201d because it can apply unexpectedly and at a steep rate. This 25% tax is levied on the corporation paying the dividend, not the recipient, and is calculated based on the dividend amount rather than annual taxable income.&nbsp;<\/p>\n\n\n\n<p>For business owners, this means that a misstep in structuring a shareholders\u2019 agreement could expose the company to significant liability. Understanding how \u201ctaxable preferred share\u201d rules operate is therefore essential to avoid inadvertent exposure.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What is Part&nbsp;VI.1 Tax and why does it matter?<\/h2>\n\n\n\n<p>Part&nbsp;VI.1 tax applies to dividends paid on a \u201ctaxable preferred share,\u201d a term that is broader than many expect. It can extend beyond what corporate law traditionally considers a preferred share. &nbsp;<\/p>\n\n\n\n<p>While exemptions exist, they depend on the relationship between the particular shareholder and the corporation, or on certain share-related conditions. Relief is available through a deduction, but its effectiveness depends on whether the dividend-paying corporation can absorb a certain deduction against taxable income and on the corporation\u2019s effective tax rate. Given the complexity, it is almost always preferable to avoid falling within the ambit of the tax in the first place.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Can a shareholders agreement turn garden variety common shares into \u201ctaxable preferred shares?\u201d<\/h2>\n\n\n\n<p>The definition of a \u201ctaxable preferred share\u201d is not limited to what appears in a corporation\u2019s articles. The terms of a shareholders\u2019 agreement \u2013 whether or not it is a unanimous shareholders\u2019 agreement \u2013 are also relevant. In fact, any agreement relating to the shares in question, where the corporation or a non-arm\u2019s length person to the corporation is a party, is relevant to the analysis.<\/p>\n\n\n\n<p>A potential issue arises where an agreement contains a buy-sell clause. Part&nbsp;VI.1 tax can be triggered if the clause specifies the amount a shareholder may receive on the acquisition of the share (excluding an acquisition triggered by the shareholder\u2019s death) as a fixed amount or as an amount subject to a floor or ceiling price. On its face, many buy-sell clauses appear to meet this test. Does that mean all such clauses are problematic?<\/p>\n\n\n\n<p>Fortunately, the legislation includes a specific carve-out, which provides that, in the case of an agreement, any provision under which a person agrees to acquire a share for not less than its fair market value is ignored. Although this statement glosses over certain timing and valuation technical considerations, the key takeaway is that careful drafting can help prevent adverse tax consequences.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What did the Canada Revenue Agenda say in Ruling 2023-0970691R&nbsp;3?<\/h2>\n\n\n\n<p>In a recent ruling, the Canada Revenue Agency (the \u201c<strong>CRA<\/strong>\u201d) examined a shareholders\u2019 agreement involving common shares. The relationship among the shareholders was not clearly defined. The shareholders\u2019 agreement, among other things, gave certain shareholders the right to require the corporation to repurchase their shares (described as Class B common shares), either as of a specified date or in the event of default under the agreement. A bonus was also payable if certain triggering events occurred within 12 months of the disposition, calculated based on the transaction value. In other words, it seemed that the shareholders whose Class B common shares were repurchased would be entitled to additional compensation if the subsequent transaction value was higher.&nbsp;<\/p>\n\n\n\n<p>The CRA ruled that this particular clause, in itself, would not cause the Class B common shares to be \u201ctaxable preferred shares.\u201d Notably, the ruling did not rely on the special carve-out, suggesting that the bonus payment did not make the repurchase price subject to a floor or, in the words of the definition, an amount not less than a minimum. It may have been the uncertain nature of the increased payment that the CRA found persuasive.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What should businesses and advisors do?<\/h2>\n\n\n\n<p>The definition of \u201ctaxable preferred share\u201d is broad, and the potential consequences can be significant. Even ordinary common shares may be caught if shareholder arrangements are not carefully drafted. If you are reviewing shareholders\u2019 agreements or planning corporate structuring, our <a href=\"https:\/\/www.millerthomson.com\/en\/expertise\/tax\/\">Corporate Tax Group<\/a> can help you navigate the complexities of Part&nbsp;VI.1 and avoid costly surprises.<\/p>\n\n\n\n<p>Connect with us today to discuss your specific situation and <strong><a href=\"https:\/\/www.millerthomson.com\/en\/subscription\/\">subscribe to our\u00a0newsletters\u00a0<\/a><\/strong> to receive timely insights on legislative updates.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Part&nbsp;VI.1 tax under the Income Tax Act is often described as a \u201ctrap for the unwary\u201d because it can apply unexpectedly and at a steep rate. This 25% tax is levied on the corporation paying the dividend, not the recipient, and is calculated based on the dividend amount rather than annual taxable income.&nbsp; For business [&hellip;]<\/p>\n","protected":false},"author":122,"featured_media":32617,"parent":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[551],"insight-format":[416],"class_list":["post-40306","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-corporate-tax"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.1.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Can common shares trigger Part\u00a0VI.1 tax? Key risks hidden in shareholder agreements | Miller Thomson<\/title>\n<meta name=\"description\" content=\"Part VI.1 tax under Canada\u2019s Income Tax Act can apply unexpectedly to dividends on \u201ctaxable preferred shares,\u201d creating costly exposure for corporations. Learn how shareholder agreements and buy-sell clauses can inadvertently trigger this 25% tax \u2014 and what careful drafting and CRA guidance reveal about avoiding it.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.millerthomson.com\/en\/insights\/corporate-tax\/can-common-shares-trigger-part-vi-1-tax-key-risks-hidden-in-shareholder-agreements\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Can common shares trigger Part\u00a0VI.1 tax? 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Key risks hidden in shareholder agreements | Miller Thomson","isPartOf":{"@id":"https:\/\/www.millerthomson.com\/en\/#website"},"primaryImageOfPage":{"@id":"https:\/\/www.millerthomson.com\/en\/insights\/corporate-tax\/can-common-shares-trigger-part-vi-1-tax-key-risks-hidden-in-shareholder-agreements\/#primaryimage"},"image":{"@id":"https:\/\/www.millerthomson.com\/en\/insights\/corporate-tax\/can-common-shares-trigger-part-vi-1-tax-key-risks-hidden-in-shareholder-agreements\/#primaryimage"},"thumbnailUrl":"https:\/\/www.millerthomson.com\/wp-content\/uploads\/2025\/05\/insights_tax_accountant.jpg","datePublished":"2025-10-23T18:54:03+00:00","dateModified":"2025-10-23T18:54:05+00:00","description":"Part VI.1 tax under Canada\u2019s Income Tax Act can apply unexpectedly to dividends on \u201ctaxable preferred shares,\u201d creating costly exposure for corporations. 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Key risks hidden in shareholder agreements"}]},{"@type":"WebSite","@id":"https:\/\/www.millerthomson.com\/en\/#website","url":"https:\/\/www.millerthomson.com\/en\/","name":"Miller Thomson","description":"National law firm providing business law expertise and litigation and disputes services for businesses across Canada since 1957.","publisher":{"@id":"https:\/\/www.millerthomson.com\/en\/#organization"},"potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.millerthomson.com\/en\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Organization","@id":"https:\/\/www.millerthomson.com\/en\/#organization","name":"Miller Thomson","url":"https:\/\/www.millerthomson.com\/en\/","logo":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.millerthomson.com\/en\/#\/schema\/logo\/image\/","url":"https:\/\/www.millerthomson.com\/wp-content\/uploads\/2024\/10\/miller-thomson.svg","contentUrl":"https:\/\/www.millerthomson.com\/wp-content\/uploads\/2024\/10\/miller-thomson.svg","width":380,"height":50,"caption":"Miller Thomson"},"image":{"@id":"https:\/\/www.millerthomson.com\/en\/#\/schema\/logo\/image\/"},"sameAs":["https:\/\/www.facebook.com\/MillerThomsonLaw\/","https:\/\/x.com\/millerthomson","https:\/\/www.linkedin.com\/company\/miller-thomson-llp\/","https:\/\/www.youtube.com\/@millerthomson"]},{"@type":"Person","@id":"https:\/\/www.millerthomson.com\/en\/#\/schema\/person\/be05481ca4ee617c24b33993ade4c881","name":"Sebastian Vives","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.millerthomson.com\/en\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/9c50194d3d05da0f277cc6ce0c163d04a4150aed35e0d008c0cba4866c37cc31?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/9c50194d3d05da0f277cc6ce0c163d04a4150aed35e0d008c0cba4866c37cc31?s=96&d=mm&r=g","caption":"Sebastian Vives"}}]}},"_links":{"self":[{"href":"https:\/\/www.millerthomson.com\/en\/wp-json\/wp\/v2\/posts\/40306","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.millerthomson.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.millerthomson.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.millerthomson.com\/en\/wp-json\/wp\/v2\/users\/122"}],"replies":[{"embeddable":true,"href":"https:\/\/www.millerthomson.com\/en\/wp-json\/wp\/v2\/comments?post=40306"}],"version-history":[{"count":0,"href":"https:\/\/www.millerthomson.com\/en\/wp-json\/wp\/v2\/posts\/40306\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.millerthomson.com\/en\/wp-json\/wp\/v2\/media\/32617"}],"wp:attachment":[{"href":"https:\/\/www.millerthomson.com\/en\/wp-json\/wp\/v2\/media?parent=40306"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.millerthomson.com\/en\/wp-json\/wp\/v2\/categories?post=40306"},{"taxonomy":"insight-format","embeddable":true,"href":"https:\/\/www.millerthomson.com\/en\/wp-json\/wp\/v2\/insight-format?post=40306"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}