The majority of entrepreneurs understand the importance of having a will to deal with the tax consequences of their death, but many are still unaware of the role that a shareholders agreement can play in their estate planning.
One of the most important clauses in a shareholders agreement is the “shotgun” clause which provides the procedure to follow in the case of death of a shareholder. The objective of such a clause is essentially to create a market for the shares of the deceased all while preserving the private nature of the company. The clause would involve an obligation by the surviving shareholders or the company to buy the shares of the deceased as well as the obligation of his/her heirs to sell them.
In order to achieve your goals while maximizing tax consequences for all parties, several scenarios must be considered. For example, the availability of tax exemptions for capital gains and capital dividend account are particularly important for purpose of evaluating tax consequences. It is also important to analyze the tax attributes with respect to the transferred shares, notably the adjusted cost base, the capital paid and the fair market value.
The expertise of a tax lawyer is necessary in order to choose the option best suited for your needs. This is why it is recommended that shareholders agreements include a clause according to which the surviving shareholders and the executor of the estate agree to consult a tax lawyer in the days following the death of a shareholder. A tax lawyer would have the mandate to protect the interests of the estate while allowing a reduction of the tax burden for the surviving shareholders.
Determining the price of shares in the case of death is also an essential matter when it comes time to draft a shareholders agreement. The approach selected must consider the circumstances of the company in order to reflect the price of the shares when a shareholder dies.
“Standard” shareholder agreements do not consider needs that are particular to your circumstances. The drafting of a shareholders agreement is complex and requires the expertise of a tax lawyer. Please contact a member of our Tax Law group at Miller Thomson Pouliot if you would like to obtain more information.