You’ve built a business plan for success. Now, it’s time to build an estate plan for succession.
This is the final article in a series focusing on estate planning for business owners. Previous articles reviewed tips for sole proprietors and partnerships. Today, we look at estate planning for an individual who owns shares in a privately-held corporation incorporated under the Business Corporations Act (Ontario)(the “OBCA”). Similar considerations apply to an individual who owns shares in a privately-held corporation incorporated federally under the Canada Business Corporations Act (the “CBCA”) but operating in Ontario.
Owners of privately-held corporations
A corporation is a separate legal entity created when its Articles of Incorporation are filed with and approved by the relevant government body. The corporation’s board of directors manage (or supervise the management of) the business and affairs of the corporation and are generally elected to do so by the shareholders. Directors can sometimes delegate their management duties to officers (such as the Chief Operating Officer, Chief Executive Officer, and so on). The corporation essentially “acts” through the actions of its board of directors and officers.
Investors who wish to share in a corporation’s profit can purchase its shares. A privately-held corporation cannot sell its shares to the public. Nevertheless, you might own shares in such a corporation because you founded the business (either alone or with others) or under special exemption rules for certain types of investors, such as angel investors or certain friends and family.
There are unique estate planning tools that can benefit individuals who own shares in privately-held corporations. Before we get to those, there are some basic things to consider if you own shares in such a corporation.
What happens to your corporation after you die?
A corporation remains in existence even if you die. It must continue to meet its obligations, including paying its employees and taxes and completing any ongoing contracts. Directors and officers are responsible for making sure the corporation continues these tasks. But, a director appointment is a personal right, meaning if you are a director of a corporation when you die, your Estate Trustees cannot simply step into your shoes and become a director of the corporation: they must be elected by the shareholder(s). This can be problematic if you are the sole shareholder and director and you die without a Will: the corporation’s obligations may continue to build while your family and friends decide who will seek appointment as your Estate Trustees and exercise their rights to elect a new director on behalf of your estate. Moreover, this means that if you are the sole shareholder and director and die without a Will, you cannot control who will be elected as your replacement director(s). You will therefore lose a valuable opportunity to have input into management of the corporation’s affairs after you die.
Importance of Shareholder Agreement
When you are one of multiple shareholders in a corporation, your most important estate planning tool will actually be a shareholder agreement. This is an agreement between some or all of the shareholders governing various management and operational matters. Each of the OBCA and CBCA create a set of default rules that apply to all corporations incorporated under their respective jurisdictions, including the scope of directors’ management duties and various shareholder rights and obligations. A shareholder agreement can modify or remove some of these default rules.
For example, one of the most important questions is what might happen to the business when you die.
Sometimes, there is value to selling a business as a going concern by selling the corporation’s shares. Other times, there is value to only selling the corporation’s assets, or even simply winding up the corporation. In these latter cases, the shares are not sold – but can be used to distribute profits to the shareholders.
Other times, there is value to simply continuing to operate the business. The other shareholders may wish to buy your shares. You might wish to have certain family members take over your shares and continue in the business.
All of the above options carry significant tax and valuation implications for your estate and consequently for your beneficiaries. A shareholder agreement can modify, grant or remove some or all of these options. While both the OBCA and CBCA provide remedies where a shareholder is being oppressed or treated unfairly as a result of actions taken by directors, these can be costly and time-consuming remedies to obtain and require resort to the court.
A shareholder agreement can govern how and when your estate is entitled to sell your shares, if that is the desired path. Without a shareholder agreement, there may be no practical way for the estate of the deceased shareholder to convert the shares into cash, possibly causing liquidity issues for the estate and leaving beneficiaries and dependents with an asset of limited benefit or use. There are default rules under the OBCA (or CBCA) that govern the rights and obligations of selling shareholders, but they can be difficult to implement or enforce. Similarly, if the deceased owns 50% of the voting shares of the corporation, or less, the estate of the deceased shareholder may have limited ability to directly influence when and how profits of the corporation are distributed.
Use of Multiple Wills
When you die owning shares of a privately-held corporation, your shares will be valued and dealt with as part of your estate. Your Will is another important tool to direct your Estate Trustees how your business interests will be dealt with after your death. Further, if you are an owner of a privately held corporation, you may want to consider having multiple Wills.
In Ontario, when you die with a Will, your Estate Trustees may be required to obtain a Certificate of Appointment of Estate Trustee with a Will (so-called, “probate”) from the court in order to administer your estate. The necessity of probate depends on the nature and extent of your assets and it is mostly determined by a third party asset holder. For example, if you die with a real estate property registered in your sole name, the Land Registry Office, in most cases, requires the Estate Trustees to obtain probate to sell your property. Similarly, if you own investments personally, your financial institution may request probate in order to release the funds to your Estate Trustees. In contrast, if you own shares of a private corporation, probate is often not required for your Estate Trustees to deal with your shares.
When your Estate Trustees apply to the court for probate, probate fees (officially called “Estate Administration Tax”) have to be paid along with your probate application. In Ontario, you can have more than two Wills to save probate fees and facilitate the administration of your estate assets disposal of which do not require probate. As you see from the chart below, the multiple Wills strategy allows you to separate your assets into two baskets (Wills) – one for your assets subject to probate and the other for your assets not subject to probate.
For example, if you die with only one Will owning shares in your corporation valued at $2,000,000 at your death, $29,250 will have to be paid as probate fees. Thus, by having multiple Wills, your estate can save $29,250 which would otherwise be payable as probate fees on the value of your shares. A careful drafting of your Wills and a comprehensive review of your affairs by your lawyers and tax advisors are required for a seamless administration of your estate under multiple Wills.
Leaving a clear roadmap to your loved ones
In the end, think of what you went through to set up your business: the hours of research and decisions it took to bring it to life. Now imagine if you leave all that without a roadmap for unwinding it or maximizing its value for your estate. An estate plan is critical to give your loved ones the starting point and make sure your affairs are looked after upon your death.
 Pursuant to the Estate Administration Tax Act, 1998, if you apply for probate after January 1, 2020, Estate Administration Tax is calculated as follows:
- For estates valued $50,000 or less, no Estate Administration Tax is payable.
- For estates valued over $50,000, the Estate Administration Tax is calculated as $15 for every $1,000 of the value of the estate.