Estate planning for BC business owners: wills, powers of attorney and shareholder terms

For many owner-managers, the company is their largest asset and the one most likely to stall if something happens to them. A will and power of attorney written without the company in mind can leave no one with clear authority to run it.

This article looks at the business layer of an estate plan: what happens to a BC company when its owner dies or loses capacity, where personal documents fall short, and what the company's own documents need to say.

The company carries on; your shares pass through your estate

A company is a separate legal person, so it does not end when you die. Your shares form part of your estate and pass under your will. What ends is your own authority: under the Business Corporations Act (BCA), a director ceases to hold office on death. If you were the only director, there is no one left to act as the board.

The BCA fills that gap through the shareholders. If no directors are in office, shareholders holding more than half the votes can sign a written instrument authorizing someone to call a shareholders' meeting and appoint interim directors. Your personal representative, usually your executor, has the rights attached to your shares once the company has appropriate evidence of their appointment, and can apply to be registered as the shareholder. On a death, the documents the Act lists for that include a grant of probate or administration, or the will or other evidence under which the shares are claimed.

In practice, the executor you name may end up deciding who runs your business while the estate is administered. Choose someone with the judgment and time for that role, and keep the minute book, central securities register and key account details where they can be found. Shares held in joint tenancy with another person are treated differently, so check how yours are registered.

If you lose capacity: the gap a power of attorney does not fill

Incapacity is often harder to deal with than death, because nothing changes automatically. An individual who has been found by a court to be incapable of managing their own affairs, or who is subject to a certificate of incapability under the Adult Guardianship Act, is not qualified to act as a director and must promptly resign. Until then, a sole director who cannot make decisions can leave the company with no one able to make board decisions.

An enduring power of attorney under the Power of Attorney Act lets your attorney deal with your financial affairs. That generally includes your shares as property, so your attorney may be able to exercise your rights as a shareholder. Acting as a director is different: directors owe personal duties to the company, and the role is generally treated as one you cannot hand to an agent. The regulation under the Representation Agreement Act draws the same line for section 7 representatives. Exercising voting rights attached to shares is part of routine financial management, but acting as a director or officer of a company is expressly excluded.

Without an enduring power of attorney, your family may need to apply to the BC Supreme Court to have someone appointed to manage your affairs, which takes time the business may not have. A representation agreement is no substitute; it is mainly for personal and health care decisions.

Useful steps include an enduring power of attorney that expressly covers your shares and your rights as a shareholder; a second director, or a clear process in the articles or a shareholders' agreement for appointing one; and banking and signing authorities that do not depend on you alone.

What your will should do about the business

• Say who gets the shares. Leaving shares in equal parts to children who work in the business and children who do not can make every later decision harder. Some owners leave the shares to those running the business and balance the others with different assets or insurance.
• Give your executor the powers the business needs. A will can expressly authorize your executor to hold and vote shares, keep them instead of selling quickly, and deal with the company while the estate is administered.
• Match your company documents. A gift of shares in your will generally takes effect subject to any transfer restriction or buy-sell obligation in the articles or a shareholders' agreement. If your co-owners must buy your shares, plan for the sale proceeds, not the shares.
• Think about probate. Some owners structure their wills so private company shares can be transferred without a grant of probate where the law allows, which can reduce probate fees. It depends on careful drafting and on the company's articles; see Reducing Probate Fees in BC.

Co-owners: buy-sell terms for death and disability

If you own the company with others, your shareholders' agreement should say what happens to an owner's shares on death or long-term disability: whether the others must or may buy them, how the price is set and how the purchase is paid for. Life insurance is often used to fund a buyout on death. Disability is harder, so the agreement needs a clear definition and a waiting period. We cover these terms in Shareholders' agreements in BC.

Make sure the agreement and your will point the same way. A clause requiring your estate to sell, combined with a will leaving the shares to a child who expects to take over, creates a conflict your executor will have to resolve.

Tax at death: deemed disposition and the spousal rollover

Under subsection 70(5) of the Income Tax Act, you are treated as having disposed of your capital property, including private company shares, at fair market value immediately before death. Any accrued gain is reported on your final return even though nothing was sold, and the tax is generally paid from your estate.

If the shares go to your spouse or common-law partner, or a qualifying spousal trust, subsection 70(6) generally lets them pass at their tax cost, deferring the gain. Your executor can elect out of that rollover property by property. Shares of a qualified small business corporation may also be eligible for the lifetime capital gains deduction.

Owners of growing companies sometimes use an estate freeze to fix the current value of their shares so future growth goes to the next generation. A freeze has tax, family and control consequences, so it is work for your lawyer and accountant together.

The combined review: documents that should line up

1. Your will, with executor powers and gifts that fit the company documents.
2. An enduring power of attorney that expressly covers your shares.
3. The company's articles, including share transfer restrictions and how directors are appointed.
4. A shareholders' agreement with death and disability terms, if you have co-owners.
5. An up-to-date minute book, central securities register and list of directors.
6. Insurance and beneficiary designations that match the rest of the plan.

Own a BC company? Make your estate plan and company records work together

Our business lawyers can review your articles, shareholders' agreement and corporate records alongside your will and enduring power of attorney, and coordinate with your accountant on the tax side.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.