Key Tax Issues for Shareholder Agreements
If you have decided to develop a shareholder agreement for your company, there are several important issues to think about to prevent any legal or tax complications.
1. Initial Control of the Company – When you initially designate the company control for your business, it sets up how the organization is classified for tax purposes. Whether the control structure is for a single voting individual or a unanimous shareholder agreement, there are different rules, regulations and tax exemptions for every classification. For instance, if your business is designated as a Canadian-controlled private company (CCPC), your organization may be eligible for small business deductions, capital gains exemptions and other tax benefits.
2. Changing Control through Buy or Sell Agreements – When setting up the control of the organization, the CRA recognizes the options built into the shareholder agreement for buying or selling shares. The potential issues that need to be addressed ahead of time include anti-dilution provisions, right of first refusal, shotgun clauses and any deals where shareholders force other shareholders to buy or sell their shares. Also, you should prepare for situations in the shareholder agreement like retirement, marital status changes or termination of employment so the CRA will allow the other shareholders to take over those shares. However, be aware that the company control may shift after one of these situations and possibly affect the organization’s tax classification.
3. Non-Arm’s Length Buying or Selling Shares – Typically, the term “non-arm’s length” refers to family members or spouses who own a business together. Whenever non-arm’s length shareholders buy or sell shares between themselves, the fair market value must be used for those transactions. Otherwise, the CRA will investigate these transactions and possibly double tax the sale.