CANADA Law and Practice Contributed by: Ian Hull, Suzana Popovic-Montag and Nick Esterbauer, Hull & Hull LLP
4.2 Succession Planning The individual managing a business should create a secondary signing authority on business accounts to ensure the business can continue to operate during emergencies. For example, in a law firm, the managing partner should provide a licensed lawyer or paralegal with signing authority for the firm’s bank accounts, including its trust account, to ensure continued access to client and firm resources if the managing partner is unexpectedly absent. It is also important to keep clear records and files, in order to ease the transition during emergency or planned succession. For smaller businesses, an owner buyout may be advisable. A buyout structured over an extended peri - od may have fewer tax consequences than an imme - diate buyout. The use of a promissory note payable over several years may also limit the taxable capital gain resulting from the sale of a business. Starting in 2024, the tax consequences are further reduced for genuine intergenerational business transfers that are either immediate (made within 36 months) or gradual (made over five to ten years). If the family business is a partnership, a partnership agreement may specify how the business will be divid - ed on dissolution or upon the retirement, incapacity or death of a partner. If the business is operated through a corporation, a shareholders’ agreement may accom - plish the same objectives. Where no such agreement exists, the Canada Business Corporations Act, RSC 1985, c C-44 (or provincial equivalents) and provincial partnership legislation may apply. An “estate freeze” is another option for transferring corporate business interests to family members or facilitating the future sale of a business. Estate freezes can be used to transfer future increases in the value of a family business to family members, who will subse- quently receive the business interest. Although estate freezes can be complex and expensive, they can be utilised to facilitate business succession and avoid insufficient funds for the next generation to purchase the interest, while spreading tax liability on the dispo - sition of the business over several years. Failing to implement a business succession plan may result in unintended consequences, such as the failure
of the business if no one is authorised to manage it, or its sale to generate needed liquidity. 4.3 Transfer of Partial Interest When valuing interests in companies, if the rights associated with different classes of shares and dif - ferent proportions of shares differ, the value of shares in a company may not be the same because of the degree of control they confer. The fair market value of a minority interest in a corporation in Canada, even on a pro rata basis, is less than the same number of shares forming a majority interest. The term “minority discount” refers to the difference between the fair market value of shares and their pro rata value. The reduced market value results from the inability of a minority shareholder to unilaterally elect the majority of directors, direct the payment of divi - dends, and make most major decisions affecting the corporation. 5. Wealth Disputes 5.1 Trends Driving Disputes Several demographic trends are currently driving an increase in wealth disputes in Canada. Second marriages and common-law relationships are one such trend. Disputes can arise between a surviv - ing spouse and adult children from an earlier relation - ship or between a surviving partner and a spouse from whom the deceased was separated but not legally divorced. As the value of Canadian homes continues to rise owing to inflation, real property is often the primary asset of an estate and may justify estate litigation, depending on its value. In metropolitan areas such as Toronto, the average price of a detached home exceeds CAD1 million. More Canadians are living longer and may require assistance from family members or professional car - egivers. Parents may wish to provide more to relatives who assist them and less to family members who have provided little support. Disgruntled beneficiaries who
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