When an Owner Dies

The shares of a private company are frequently the largest asset in an estate, the hardest to value, and the one a will divides least well.

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Shareholder AgreementsControlLiquidityTax on Death

Buy Sell Provisions | Estate Freezes | Insurance Funding | Executor Powers

Where succession plans fail.

A will divides value. It does not decide who should run a business.

A shareholder agreement may already dictate what happens, overriding the will.

A deemed disposition on death can create tax with no cash to pay it.

Executors are often asked to run a business they do not understand.

Quick Answer

What happens to shares in a private company when the owner dies in Ontario?

It depends first on any shareholder agreement, which frequently contains buy sell provisions that determine what happens on death and take priority over the will in practical terms. Absent such provisions the shares pass under the will or on intestacy, and the estate trustee holds them. Two problems commonly follow. There is generally a deemed disposition of capital property at death, which can create a tax liability without producing cash, and beneficiaries who inherit shares may have no interest in or capacity for running the business.

Ontario law · Reviewed by Lexaltico LLP, Toronto · Arrange a consultation

THE AGREEMENT COMES FIRST

What the Shareholders Already Decided

Before looking at the will, look at the shareholder agreement. Many contain buy sell provisions triggered by death, obliging the estate to sell and the surviving shareholders to buy, at a price set by a formula or a valuation mechanism.

Where such a provision exists, the will cannot give the shares to a child if the agreement requires them to be sold. What the beneficiaries receive is the proceeds, at whatever the mechanism produces, which is frequently well below open market value.

This is worth checking while everyone is alive. An owner who assumes the business will pass to a daughter, and whose agreement says otherwise, has a plan that will not survive contact with the document.

CONTROL VERSUS VALUE

The Equal Will That Splits a Business

A will dividing an estate equally between three children hands each a third of the company. If one has worked in the business for a decade and two have not, that outcome satisfies nobody. The active child now answers to siblings who have no interest in the enterprise, and the inactive children hold an illiquid asset producing nothing.

The usual solution separates control from value. Voting shares pass to the person who will run the business, while non voting or preferred shares pass to the others, and other assets or insurance proceeds balance the arithmetic.

That structure has to exist before death. Creating it in a will alone does not work if the underlying share structure has only one class, which is a decision made at incorporation and rarely revisited.

LIQUIDITY

Tax Without Cash

Capital property is generally treated as disposed of at fair market value immediately before death. For a business built over decades that can produce a substantial gain, and therefore a substantial liability, in an estate whose principal asset cannot readily be sold.

A rollover to a spouse can defer the issue. It does not remove it, and it may simply move the same problem to the second death, often with a larger number attached.

Life insurance is the conventional answer, either owned personally or by the corporation, and it can also fund a buy sell obligation. The structure of who owns the policy and who receives the proceeds has significant consequences and should be designed with the corporate and tax position together rather than separately.

HOW WE WORK

What to Bring, and What to Expect

Bring the minute book, the articles, any shareholder or partnership agreement, the current will and powers of attorney, and details of any insurance. If the minute book has not been maintained, say so at the outset. It is common and it is fixable.

Expect the corporate and estate sides to be handled together. A will drafted without reading the shareholder agreement, or an agreement drafted without regard to the estate plan, is how families end up in litigation.

Expect us to work with your accountant. The tax treatment on death drives much of the structure, and a legally elegant plan that ignores the tax consequences is not a plan.

Common Questions

Frequently Asked Questions

Does my will control what happens to my company shares?

Not necessarily. A shareholder agreement with buy sell provisions triggered by death may require the estate to sell, in which case the beneficiaries receive proceeds rather than shares.

What is the problem with dividing a business equally among children?

It divides control as well as value. The child running the business ends up answerable to siblings with no involvement, and the others hold an illiquid asset. Separating voting from non voting shares usually works better.

Why do estates run out of cash?

Capital property is generally treated as disposed of at fair market value immediately before death, which can create a tax liability while the main asset, the business, cannot readily be sold.

Can life insurance solve it?

It is the conventional funding tool, both for tax on death and for buy sell obligations. Who owns the policy and who receives the proceeds materially affects the outcome and should be structured deliberately.

When should succession planning start?

Well before it feels urgent. The structures that make a transfer efficient generally have to be in place years ahead, and a shareholder agreement written today cannot fix a share structure that has only one class.

Arrange a Call

Business Succession on Death | Ontario | Lexaltico LLP

Our lawyers plan and administer estates containing private companies. Call, email, or arrange a consultation. Bring the shareholder agreement and the current will.

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