CANADA Law and Practice Contributed by: Ian M Hull, Suzana Popovic-Montag and Nick Esterbauer, Hull & Hull LLP
death, facilitating the continuation or transfer of the business. Conversely, inadequate asset protection may frustrate succession planning. If the tax liabilities arising from the deemed disposition of the business exceeds the estate’s liquid assets, the business may need to be dissolved. Partnerships A partnership agreement is essential for succession planning. Without one, the partnership will generally dissolve on a partner’s death, and profits and partner- ship property will be distributed equally, regardless of partners’ respective contributions. A well-drafted partnership agreement may allow part- ners to designate successors in their wills, or require the surviving partners to buy out the deceased part- ner’s interest. For tax purposes, a partnership agree- ment should also specify whether the deceased partner’s estate will receive a continuing partnership interest or a right to receive property from the part- nership. Corporations Because a corporation is a separate legal entity, con- trol of the corporation following a shareholder’s death is often governed by corporate instruments, like a shareholder agreement, rather than the shareholder’s will. A common succession planning strategy for corpo- rations is an estate freeze, which fixes the value of the current owner’s interest in corporate shares at the date of the freeze. The owner typically exchanges existing shares for fixed-value preferred shares, and new common shares are issued to successors so that future growth accrues to them. Estate freezes facilitate intergenerational planning and may reduce probate fees. Valuation discounts may also arise when trans- ferring minority interests to family members. Life insurance is also frequently used in closely held corporations to fund buy-sell obligations under share- holder agreements or to protect business loans. Where a private corporation owns and is the beneficiary of a life insurance policy, the policy proceeds – net of the adjusted cost basis – may also be credited to the corporation’s capital dividend account, allowing the
corporation to distribute a substantial portion of pro- ceeds to shareholders as tax-free capital dividends. Canadian law is divided on whether corporate assets may be disposed of through a shareholder’s will. Courts in Ontario, Alberta, and Manitoba have per- mitted such gifts, particularly where the testator was the sole shareholder of the corporation, whereas case law from Saskatchewan has not. 8.2 Legal and Tax Considerations Sole Proprietorships If ownership of a business is transferred before death through a buyout, the resulting tax consequences may be reduced, depending on the terms of the sale. For example, structuring the purchase price as a prom- issory note payable over several years may spread the taxable capital gains resulting from the sale over a number of tax years. Starting in 2024, tax relief is also available for qualifying intergenerational busi- ness transfers that occur either immediately (within 36 months) or gradually, over five to ten years. If a business or business assets are transferred through a will that is admitted to probate, probate fees or estate administration tax will be calculated on their value. In some jurisdictions, this may be avoided by transferring the business or assets through a second- ary will that is not admitted to probate. This practice is permitted in Ontario and British Columbia, but may not be available elsewhere in Canada. An option to purchase may not always operate as intended during estate planning. Their effectiveness may depend on the overall liquidity of the estate if unexpected debts arise. For example, in Hale v Stew- art , 2025 ONSC 2275, options to purchase farmland contained in a will could not be honoured because the estate faced an unexpected tax liability arising from the deemed disposition of the farmland. Because the estate did not have sufficient funds to satisfy the tax liability, the gifted options to purchase had to abate to pay the tax liability. In this case, the purchase price set for the farmland was also significantly lower than fair market value; had the options to purchase been exer- cised, there still would have been insufficient funds to satisfy the outstanding taxes.
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