Every business corporation or enterprise wants to retain its lion share of investors. However, in periods of economic expansion, investors are on the lookout for better opportunities to exit the business. To avoid these stresses and reduce the risks associated with each new opportunity, it is critical for the shareholders to have a clear set of rules that apply to them. The agreement used for these rules is called a Unanimous Shareholder Agreement (USA).
What is a Unanimous Shareholder Agreement?
Under the Canada Business Corporations Act (CBCA), a unanimous shareholder agreement is an agreement that is among all the shareholders of a corporation and that restricts the powers of directors to manage or supervise the management of, the business and affairs of the corporation.
What is the Need for a USA?
A Unanimous Shareholders Agreement in Alberta can help settle disagreements between shareholders. Factors arise in the personal lives of shareholders that can negatively impact a corporation or leave it in a state of limbo that can hinder its success. Such situations being :
Situation 1: In the Event of the Death of a Shareholder
In the event of the death of shareholders, his or her shares may divert to a widow or children. In such an event, it important that you’re USA contains how shareholders may divest of company shares. Shareholders may not want to conduct business or give decision-making authority to family members, and the USA can cover this. It can also prevent family members of the deceased from selling shares to another party without shareholder consent.
Situation 2: When a Shareholder Leaves the Country
This is especially important, as your corporation can lose the tax advantages that comes with having a Canadian Controlled Private Corporation status. This can place a higher tax burden on your corporation, making it crucial that you have some provision for handling these shares if this does happen.
Tax Consequences of death of shareholder
The tax consequences for the estate and the surviving shareholders will vary depending on the scenario chosen. Let’s take a look at the following example.
Martin is deceased. Before his death, he owned 40 percent of Corporation A. These shares had a paid-up capital (PUC) and an adjusted cost base (ACB) of $4,000, and a fair market value of $604,000. Martin and the other shareholder, Denise, whose shares have a PUC and an ACB of $6,000, signed a shareholder agreement in 1998, under which the surviving shareholder would become the sole shareholder following the death of the other party. The purchase of the deceased shareholder’s shares is financed by a life insurance policy held by Corporation A. The capital dividend account (CDA) created when the proceeds of the life insurance policy are received is equal to the price paid for the shares. The personal tax rates are 30% on dividends and 45% on other income. The shares are not eligible for the capital gains deduction.
It is important for every budding entrepreneur to understand the tax provisions relating to the ITA, before getting into the drafting stage. ATS Accounting provides in- depth tax consulting and business start up services required for individuals and businesses to incorporate into their USA, to improve their profitability.