Death & The Shareholders Agreement

The shareholders agreement is an important part of your business. It addresses many common situation business owners may face when they have partners in the business.

Your shareholders agreement is also part of your succession plan and deals with what happens on your death.

If you have a shareholders agreement, does it provide enough flexibility for your executor and the remaining shareholders to structure the buyout to minimize taxes and provide positive cash flow to your estate?

life-insuranceThe tax-free nature of life insurance payments may help. Here’s how:

Life insurance proceeds received by a corporation or individual is normally received tax free.  In a corporation, the proceeds are credited to a notional account known as the the capital dividend account.

An amount equal to the proceeds less the adjusted cost basis of the policy can is added to this account and in turn can be paid to the shareholders tax-free as a capital dividend.

This tax-free dividend can be used by the surviving shareholders to purchase your shares and potentially preserve $750,000 capital gains exemption.

On the other hand, the corporation may redeem your shares and your estate receive a tax-free dividend to the extent of the balance in the company’s capital dividend account.

Without life insurance, the tax-free transfer of ownership cannot occur and there will be either a capital gain or a deemed dividend reported.

It is important to structure the agreement properly and have the proper insurance in place to minimize the tax bill and provide more value to your family.

Is Your Succession Plan Tax Efficient?

Call us today at (289) 288-1206 to email us to arrange your appointment.

Dean Paley

A graduate of Simon Fraser University, Dean started and operated an independent painting company while perusing a degree at SFU. After graduating from Simon Fraser, Dean entered the Certified General Accountants Program of Professional studies where he obtained the professional CGA designation. After a number of successful years as the head of finance for the Canadian operations in a global financial services firm, Dean moved into a marketing role and established and launched a tax, estate and financial planning support department and service to advisors and clients. During this time Dean successfully obtained the Certified Financial Planner (CFP) designation. Dean has been a member of the Canadian Forces Reserve spanning three decades serving in the Royal Westminster Regiment (B.C.), the Military Police and later as a commissioned officer in the Cadet Instructors Cadre in Hamilton Ontario. Dean Paley CGA CFP has been interviewed and quoted in major media such as the National Post, Financial Post, Toronto Star, Canadian Business, Money Sense and Investment Executive. Dean is married to his lovely wife Deborah and has four lovely children.