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Clayton Achen (00:02):
Sander van der Wissel from Van Der Wissel Law is with us on this week’s episode. I’m super excited to have Sander. Thank you so much for joining us. Just as a bit of background, and then I’ll hand it over to you to do a little introduction of yourself, I’ve worked with Sander on a couple of files, mostly tax structuring, reorganization and transition planning. Sander handles a lot of trust planning as well, so he’s the lawyer that you want when you’ve got complicated corporate tax stuff going on.
Sander Van Der Wissel (01:08):
Hey Clayton, thanks for having me. I appreciate it. It’s a great opportunity to do this together. So
Clayton Achen (01:14):
Today’s topic is pretty exciting. It is sort of cradle from the cradle to the grave in terms of the lifecycle of a corporation and there’s a lot of legal changes and how things evolve and that’s kind of what we’re talking about today, right?
Sander Van Der Wissel (01:29):
Correct?
Clayton Achen (01:30):
Yeah, so I think it’s safe to say you’ve been at this a while. Why don’t you tell us a bit of your background and your history?
Sander Van Der Wissel (01:37):
I am new to Canada – came in 1999, settled in Calgary, and articled with an all-service firm, Burnett Duckworth Palmer, which gave me a good groundwork for the area of expertise that I eventually developed, and I was with them for a couple of years before moving to a boutique tax firm. Then with a partner for a few years and then on my own since 2009. So it’s been a while.
Clayton Achen (02:20):
Yeah. Fabulous. Thank you. We’re jumping right by having a proprietorship, and I guess if we just touch on it briefly, I’ve got a great article on the website that talks about it, and I think there’s even a podcast that we did… episode two or three or something where we talked about if it was appropriate to incorporate your business. So for the purposes of this, we’re going to move past that and go, you have incorporated, you’ve made the decision at some point that you’re growing a business, there’s growth inherent in whatever you’re doing, you have incorporated for whatever reasons you’ve incorporated. And so I guess Sander, let you pick it up from there and just sort of talk about the stages in the order that you want to present them in. And I think, I guess before we do that, it’s very interesting to hear a topic like this because it helps you, when you’re getting started, kind of visualize what you’re shooting for in the end and where this might be going and helps you kind of have a roadmap and identify where you are in the lifecycle of your corporation and what you might want to think about next and be able to get some affirmation on what’s passed basically.
(03:27):
So Sander, why don’t you kick us off on the topic?
Sander Van Der Wissel (03:33):
So I think once you’ve decided to incorporate and you are going and starting to get some success in your corporation, you’ll soon find that having enough money in the corporation for its own needs will cause you to have to wonder how are you going to extract the money out of the corporation. So one of the key decisions then is compensation of owners. Is it going tothe be salary or dividends, and the question comes up whether you should leave money in the corporation. So one of the earliest roadblocks is that the operational risk in a corporation may force you to think about restructuring and having a corporate shareholder to which you can distribute dividends on into corporate basis without incidence of personal tax. So I think early on in the process, a question becomes do you extract money out taxable or trying to defer the tax on that as opposed to leaving it in the corporation. That brings with it the question as to how much or how do you get it out and do you expect to be selling your shares at one point to another in the future because shares that are owned by a corporation now will not be eligible for the capital gains exemption. So that is one of the early stages or pivotal points of a corporation once you’ve had some success.
Clayton Achen (05:05):
So I guess, yeah, you can either have direct ownership in your corporation where you own it personally, and any dividends of course at that point would be taxable. But now do we want to extract some operating capital from the corporation but leave it in a corporate structure so as not to trigger personal tax? Maybe you would have a holding company introduced then, but I think if I’m listening properly, what you’re saying is that might jeopardize your access to the lifetime capital gains exemption when you eventually sell. So if that’s in your plans, you want to really give some careful consideration how you set this structure up basically. Oh,
Sander Van Der Wissel (05:40):
Exactly.
Clayton Achen (05:41):
And by the way, you can have it both ways if you have a guy like Sander on your team.
Sander Van Der Wissel (05:46):
So what we often do then is think about trust ownership and have the, because as you will know, is that if you do dividends on shares between corporations, then safe income on hand is an issue. And so the traditional way of moving money to a holding company without having safe income being a concern is to have the common shares of a corporation held by a trust and have your holding company be a beneficiary of that trust. That way you have the ability to get the capital gains exemption on the shares owned by the trust and have the ability to distribute dividends out to a corporation and have it treated as if it was a dividend that directly went from the operating company to the holding company. So yeah, I think that that is one of the key events after somebody has decided to incorporate because they like the deferral on the corporate tax as opposed to the personal tax.
Clayton Achen (06:48):
Let’s park there for a minute because I think early in my career I had actually, and I kind of feel bad about setting the structure up for a few of the people that I had, they didn’t end up having any big success in their business where they were actually able to use the structure and we set it up sort of preemptively where there was a trust stacked on top of your operating company with a holding company as a beneficiary of the trust, you get all these great hybrid benefits of access to gains exemption and the ability to pay tax-deferred in corporate dividends, but there was never enough cash to pay a corporate dividend through the structure. And so practically speaking, they just ended up paying me a bunch of money to do the returns for these things and lawyer’s a bunch of money to maintain it. What is a practical tipping point for where you want to consider this stuff? Just if you go wonder what is I wonder that’s going to trigger you to go, I might want to look at one of these hybrid structures for the layperson.
Sander Van Der Wissel (07:47):
I would say you start off unless you know that you’re going to have this kind of success in advance, which is usually not what you know, kind of hope to make the next payroll or whatever. So that’s once you get beyond that point, I would not have the structure right away. I would say wait and see, and then when you get to a point where you have this excess cash in your corporation, what you could always do is bring in a set structure of later and maybe do a one-off. If you have a certain amount of money in the corporation that you want to extract, you can do that by way of a transaction whereby you basically what I would do is I would usually do a stock dividend to the owner of the correct amount. So let’s say you want to extract $500,000, whatever that magical number is, and then you transfer that those stocks which have a low stated capital, but high value, you transfer that to your holding company in exchange for shares of the holding company.
(08:52):
So it’s section 85 rollover, and then you redeem the shares. That would be a little bit more complicated than the transaction with the trust, but you don’t set the trust up for potentially for nothing. Yeah, sure. Then if you think, well, this is going to be a matter of every year from now onwards, we know we have success, then we would say, okay, we do a freeze of the operating company. Hopefully, that is not too much of a costly exercise either because now you’ve got a valuation that you have to do and the,n you bring in the trust at that point in time. But what you’ve avoided though is basically overbuilding the structure at the outset.
Clayton Achen (09:34):
So to summarize, it is more expensive to do this later. Setting it up on day one is easier and cheaper from a legal fees, compliance fees perspective, obviously, however, waiting until later until you actually have some capital to do this type of a structure with is not such a bad idea. For one, you have the capital to do it, and I guess the second piece of that is it can be done later, so no need to panic into overbuilding your structure right away. So that makes a lot of sense for me as an accountant, I usually tell people my trigger when I’m going through somebody’s year-end or having a discussion with them, is there just a pile of passive cash sitting there or some other passive assets? Why is this giant investment account, or it doesn’t even have to be giant, but you’ve got half a million dollars sitting in an investment account that effectively it doesn’t form part of working capital. It’s sitting there just collecting investment income, you’ve got nothing else to do with it and you don’t want to put personal taxes on it. Okay, now it’s time to look at one of these structures because there are better ways that we can be doing it
Sander Van Der Wissel (10:44):
Well, that’s exactly it is that a layperson would need to get advice on saying, well, there’s a solution. You don’t have to do this. In fact, it can harm you if you were ever wanting to sell your shares of the company if you have all these redundant assets in the company.
(11:01):
So as soon as you see somebody with a GIC investment in his operating company, you kind of have to ask “Why is this there?” Because it exposes your nest egg to the operational risk, which may or may not be significant, and you don’t have to put up with it. You can actually get it in a safe haven of a holding company through this what we just discussed.
Clayton Achen (11:25):
Where do we go from there? So we’ve got our holding company, our family trust, we’re making money, we’re stuffing it into a holding company for whatever other purpose on the good advice of our tax lawyer. Next.
Sander Van Der Wissel (11:38):
Well, I think what’s next is to keep your corporation lean and mean, have only the operating assets in there, protect what you have personally and protect what you have corporately. And then the question becomes like, what do you do with your corporation on a go-forward basis? This can chuck along for a long time. What typically happens is that it grows and you want to make yourself as redundant as possible so that somebodiny wants to buy your shares without buying you as an individual to keep moving the business alone. And the way to do this often is to make the ownership attractive. So in other wordswho, there is a pattern of distributions on the shares which demonstrates to whomever working for you or business people who want to be in business with you, that the shares are where it’s at as opposed to just getting a salary for what they do.
Clayton Achen (12:38):
That is super interesting. I’ve never even, in all my years, I’ve never thought about that just demonstrating a pattern of distributions. I suppose if I was an M and A person, I would think about that more, but of course I regularly get asked, “Hey, I want to bring my employee into the share ownership.” In the back of my mind I’m thinking, well, why?
(12:56):
You’ve never paid a dividend? Is there a plan to sell this thing one day? Do you have a plan? Oh no, I don’t have a plan. Why would your employee want shares of this? I am having trouble understanding it, but you really nailed it, which is we can demonstrate a pattern of distributions,
Sander Van Der Wissel (13:12):
Right? So effectively be it a person who wants to invest as a passive investor or be it a person who you want to retain by means of ownership and elevate them from being a employee to being also an owner and a manager, that will be the next step. And depending on each person, I mean, you get some people that say, well, no, it’s, I am going to be the sole owner of this and I am not going to share the ownership with anybody. And that happens, and it happens often, but if you are wanting to ultimately sell your shares, you are going to sell it to somebody, and it may be to employees, maybe to managers other than employees, it may be to a competitor, it may be to whomever that you are ultimately going to suppose these shares of. And so that is the next stage is sort of like your exit strategy. How do you get out of this? And it’s a process of many, many, many years to get to a point where the shares demonstrate value and the value is dependent on what the balance sheet is of the company and the return as we just spoke about shares and dealing with your debt and so forth to get to a point where somebody’s willing to do business with you as a owner to owner.
Clayton Achen (14:46):
So I’ve got basically, and I deal with a lot of customers, sorry, I guess I should say. I deal it with a lot of customers who have a family trust and a HoldCo left. The options are gone, right? And so they’ve sort of gone through this stage. They were set up hopefully properly to capitalize on their lifetime capital gains exemption. This is something that you can still split with your kids, the lifetime capital gains exemption that hasn’t, we thought it was going to get taken away back in 2017 or M2018. It didn’t. And I think for every successive budget since then, except for the ones that the government chose just not to do a budget that year, which we had one or two of those in there. Everybody was worried that this was going to get taken away, that you can’t multiply your lifetime capital gains exemption with minors, et cetera.
(15:32):
That was sort of always on the radar of attack maybe, but it hasn’t changed. And so you still have a chance here to have a family trust where maybe individually you might get 900 or a million dollars of lifetime capital gains exemption. It gets indexed every year with inflation. But if I now involve my spouse in that growth and my kids, I can multiply the amount of gains exemptions that I have. The caveat here, of course, is that you have to give them the money when you sell, and it’s their choice completely. They need free will, whether or not they give it back to you. So if your 16 year old says, no, I’m not giving you the 900 bucks back, mom, you might have an issue there.
(16:15):
So hopefully you’ve been able to capitalize on your lifetime capital gains exemption and your structure set up properly for that. I just talked to a client who just set their company up and put it under another company and they’re hoping to sell it, right? They’ve got an exit strategy in mind right at the outset. I’m going to build something and sell it, and it’s a piece of tech and great, what’s it doing under your holding company? It hasn’t borrowed any money. It doesn’t have any loans. All that’s sitting in there is a bit of ip. It’s four months old. And she goes, well, I’m not sure. And so basically we had to go back and say, well, I think nobody had this discussion with you and maybe we need to look at the ownership structure of this.
(17:10):
Who gets the benefit if we do this type of move? And so that’s back to that concept of we could do this stuff now at the outset, or we could do it later. It’s more expensive to do it later, but you’ll have the capital anyways. Hopefully you were able to capitalize on your gains exemption and now you’re left with a HoldCo and a trust, and do you need the trust? I mean, that’s a question that I’m asking all the time now because historically trusts were set up for a number of reasons, but one of the main drivers was tax. Well, a lot of those benefits have gone away, not withstanding the lifetime capital gains exemption, there’s tosi, there’s no more income splitting allowed in a lot of cases that were before. And so why do you have the trust and you’re still left with this? That’s basically holding in a lot of cases of retired doctors that we’ve got or retired lawyers or retired business people who have a good nest egg sitting in there that they’re basically treating as their R S P. They’re just dripping a little bit out to them every year. And I’m sure you’re going to get there, but so you’ve sold your opco and you’re left with a trust and a HoldCo, right?
Sander Van Der Wissel (18:15):
That’s right. And so I think it’s a succession tool. So if the shares have got high value and low a c B like low cost and there’s latent gain setting in there, you have to be mindful that you could wind the trust up, you could distribute the add the shares to the beneficiaries. And even if it is to the original founder, the question is going to be what is that going to look like in an estate? And so sometimes it’s more wait and see situation and say, well, we don’t know exactly yet. Let’s also not distribute these shares to the next generation because we don’t know how their lives are going to pan out yet. So the trust serves as a great vehicle to have ownership hover for a few more years while you figure out who ultimately needs to own these shares. It brings up a different point though that I’ve seen now happen in these kind of situations as you described.
(19:08):
Is that where tax split income TOCI applies to income? Like does that investment portfolio actually conduct business and I think it has to conclude it does. And so the question then becomes is, “Who is the person actually running that portfolio?” And so what I’ve had just recently earlier this week situation where all the family members that are ultimately getting distributions from the trust are trustees, and they are been appointed as directors of the holding company and they do all the decision making together so that there is no question as to the amount of effort made by each and everybody that is getting a benefit in the hopes that one argues that tax split income does not apply to that business because it’s being conducted by everybody equally. It’s not the 20 hours a week kind of thing, it’s an investment portfolio after all, but that there is no ohad runs this and we just all nod along. No, it’s very much like you’re applying some rigor to the process.
Clayton Achen (20:29):
You’re writing down that you’re applying rigor?
Sander Van Der Wissel (20:31):
That’s right. You have the minutes being kept, you have everybody sort, everybody’s sort of being involved in an enthusiastic manner and making sure, and you also have little errands being run by each and everybody to demonstrate that this was not all just dad’s idea and dad doing the work or mom for that matter. It’s a family enterprise of sorts. So that may get around that issue. So it’s around the tosi issue. Maybe it doesn’t explain why you’re not stripping out the shares at this point in time. And in most cases, if you have young adults that haven’t settled in their lives yet, haven’t got the relationship solidified and the like, then there’s some hesitance or reluctance to distribute the shares of the holding company out to the next generation. But you are of course faced with the 21 year anniversary of the trust when you don’t want to run through that brick wall without knowing what you’re doing. So there comes a time of reckoning when those decisions need to be made.
Clayton Achen (21:40):
We’ve been talking now for, I dunno, 20 minutes, 25 minutes, something like that. And we just blew through your operating company. It was such a small part of our chat and yet, I think most people consider that to be the biggest part because you’re so actively engaged and you’re so engulfed in the day-to-day operations of the business, which is pretty normal in the scope of a life cycle of a successful business. That operating company is just one of the pieces and it comes and goes, and maybe another one comes and goes, right, I’ve got a customer who has a family trust that oversees seven operating companies in seven different regions of Canada and the same type of business, but different ownership structure. There are different partners in all of them, and that’s the way we’ve got it structured. And one has come and one has gone. And in the scope of the life cycle of your family enterprise, corporate structure, the operating company, while it generates the, it brings home the goods and fills up the bucket, it doesn’t end when you sell this thing usually, or in a lot of cases, it doesn’t end when you sell it. It’s just sort of an interesting reflection.
Sander Van Der Wissel (22:56):
I think we blew through that also because we were speaking about getting the capital gains exemption, which by inference is a share sale. So it’s goodbye to the company, but it’s not uncommon for a buyer to say, I am not interested in buying your shares. I’ll buy your book of business, your business out of your company, and if the price is right or if that’s just what it is, then you’re stuck with your company and the proceeds of the sale and then you’ve got a passive company and no different than a holding company, but the proceeds, and you might find that some of that proceeds stick behind because you don’t want to distribute it all out to yourself or to the shareholders
Clayton Achen (23:40):
Because of the tax bill, right?
Sander Van Der Wissel (23:42):
Yeah. Well, you might get some CDCDA and the like as well. It depends on what the tax is and recover some RDT OH, but you may leave some money in the corporation just because you can’t stomach the tax bill. So then you have a holding company again. And I think that that is obviously not a company that anybody wants to take off your hands. No. So the question becomes what do you do with that? Now we’ve had some feeding frenzy of surplus trip plans and the like to get these matters, get a favorable tax rate on the amounts that you take out of the corporations of late, but that may not last forever.
Clayton Achen (24:24):
That’s another one that we’ve been saying is going to go away. In the last, I can’t even every liberal budget for the last seven years, the experts have been predicting that gain stripping and the gains, capital gains, inclusion rate’s going to go up and all that’s going to change. But that has not either.
Sander Van Der Wissel (24:39):
It hasn’t, it hasn’t. And now, with the changes to guard, I’m not sure if that’s an angle that is going to cause some chill factor on doing this, but the point being though is that you sit for the corporation that may not be of utility other than to delay the tax before you take the money personally. But to get to the point of the lifecycle here is that ultimately winding a corporation up is not is a very common occurrence sort of saying, okay, we’ve now let this company dry of the money. The cost of maintaining it is not worth the money that’s worth the saving on the tax. So you’ll just distribute it out to be done. Totally normal. You don’t have to keep this company along, let the company’s come and companies go from that perspective. I’d like to circle back though, just for your listeners or the viewers to understand what the other options are as far as buying and selling.
(25:48):
You might find, for instance, that if you do exit out of your corporation, that you have amalgamation with another company. It’s not uncommon for people to decide to merge two companies. And you then have an amalgamation whereby based on the value, you take a stake in the amalgamated entity. That might be companies that you both, but all of which are owned by one owner or a group of owners, but it also might be a corporation that the two amalgamating corporations might be companies with synergist enterprises and it makes sense for them to amalgamate. So the effect of that is that your corporation comes to an end and a new corporation comes out the other end. So this, is basically a new entity from that point onwards. Again, you have shares, and now you have co-owners, other shareholders that own this one entity with you. So as far as that is concerned, I mean of course you just have an operating company still and it serves the purpose of earning an income from it and ultimately getting the benefits of a disposition, either of the business or of the shares. But you get to that outcome of a company that still exists as a result of this omelet that you create of two companies that makes sense to be a V one company.
Clayton Achen (27:14):
Yeah, interesting a merger would be another. So it’s a type of merger, right? In that case, we just went through that with a customer where they had their OPCO, the target of them, they were targeting another company, but they didn’t necessarily want to knock out that other owner. They wanted to join forces with them and instead of purchasing the shares of that other company, they amalgamated with them and they each took back equal value and now the new entity grows together subject to a new shareholder’s agreement, subject to the new articles and the new corporate structure. Right?
Sander Van Der Wissel (27:48):
For sure, for sure. And that shareholder agreement may address how somebody gets rid of their shares over a period of time, how that gets bought out, whatever.
Clayton Achen (27:55):
Sorry, you mentioned something about asset sale versus share sale. My understanding broadly is sellers, they want to sell shares, buyers want to buy assets. That’s what you hear anyways. Do you want to put a little color on that?
Sander Van Der Wissel (28:09):
For sure. For sure. And it depends on what the considerations are. For some companies, it makes way more sense to sell shares because it comes with a package of contracts and a workforce that is cohesive and has a long history and ownership of various assets that are hard to transfer. And for that reason, sale of shares is obvious to both parties, but the pressure on the vendors, their desire to do sell shares is often driven by getting access to the capital gains exemption, which for which there’s a number of requirements that will be one, and the pressure from the buyer to buy the assets might often be driven by the assets getting a bump in their basis and having depreciation of those assets over in the hands of the buyer. And it may be important to them, depends on what those assets are. Of course, the other driver for a buyer is to say, I don’t want to buy the hair that you have in this company and all the unknowns and the like. And I don’t want to take my risk on the reps and warranties that you might give me to say that everything is on the up and up. I’d rather just take the assets and not have to worry about it.
Clayton Achen (29:29):
Yeah, it’s interesting when we talk about the lifecycle of a corporation, there’s incorporation, that’s the birth of a corporation. Wind up amalgamation leads to sort of the death of a corporation. It really gives a human characteristic to a corporation. We’ve got a life event giving life to this thing, it will carry on in perpetuity unless some action is taken. And I think that’s one of the draws of a corporation. And then you have the selling of a corporation, so you can actually sell the thing and it will carry on, or you can create some terminating event. What a lot of people that I deal with when they sell their assets, they think, okay, assets are gone, I’m done. And it’s like, no, no, you got to keep filing tax returns here and we got to plan on how to actually wind this thing up. And a lot of times people don’t even want to talk about it.
(30:20):
It’s like, I’m done. I sold my assets. It’s like, Nope, you’re not done. You’ve got legal obligations. You must file tax returns for Corps in Canada. You can’t just not do that. It’s unlike a personal tax return where maybe if you didn’t have income, they won’t force you to file a tax return. Corps got to file it. So interesting difference between an asset sale and a share sale as well. Is it just in a share sale for a seller? It just puts a bow on it, right? It goes, okay, here you go, I’m done. Whereas in an asset sale, there’s still a thing to deal with afterwards, which is the liabilities. Remember, you’ve only sold the assets, there’s liabilities, and you still have to deal with the liabilities, including your tax liabilities and your obligations to under corporate law to finalize that company, right?
Sander Van Der Wissel (31:07):
Oh, for sure. And I think what I see usually happen on an asset sale is that there is some desire to take money out of the corporation and it makes sense to do so to bring the net effect of the tax down by recovering whatever tax the corporation is, some RDTOH that the corporation has paid and the like. But there’s usually some remnant and the question becomes, do you want to take it out in one go and pull off the bandaid? And if the tax bill is a deterrent, then you have a corporation and as you say, nothing’s changed, you still have to file your regular T two and deal with it as if it’s because it still exists.
Clayton Achen (31:53):
Yeah. And your accountant’s not giving you a discount just because you stopped operating. The amount of work that goes into a T two is approximately the same, assuming that your financial statements are the bookkeeping’s done. Well, I mean it’s approximately the same amount of work. I might have a few extra questions to ask you if you’re operating. So this idea that I’ve sold my assets and I just have a little T two to do maybe true if the company’s empty, but then why not wind it up anyways? And in fact, for later stage businesses that hold investments, I mean investments in a Canadian controlled private company. So you’ve sold your business, you’ve accumulated some capital and went and bought investments with that. That’s some of the most complicated area of our tax loss. So I’ve actually seen it go the other way where in fact, your bills have gone up.
(32:38):
Now I’ve got a whole bunch of tax planning to do based on you earning passive income rather than active income. And that’s the reasons for that are a whole other podcast, the concept’s called integration if anybody wants to look it up. But anyways, yeah. So it is super interesting how there’s a start an end or not, or it carries on in perpetuity. And that’s a motivation also to sell your shares is just to wash your hands of the whole thing. But as you say, when a buyer comes in, they’re doing due diligence, they’re going through the skeletons, they’re going through the old tax filings. When I do diligence, buyer-side due diligence, I’m actually looking for reasons why the person should not buy those shares and presenting them to them, right? Yeah.
Sander Van Der Wissel (33:19):
It’s a pretty rigorous process. And I kind of think in my practice, the only time that it really makes sense for a buyer is that it’s just almost impossible to transfer the business in kind. It’s much better to have the whole company to buy the whole company with everything in it and then rely on holdbacks and reps and warranties to try to keep them whole. Should there be some skeletons that come to bear that may even come as a surprise to the seller. There may nothing sinister about it. It may just be something that comes up that nobody knew about.
Clayton Achen (34:02):
Alright, so we’ve talked a little bit about what happens when you switch from being a proprietorship to incorporating spend a bit of time on growing your business and having enough capital in it to consider an alternate structure to defer some tax holding companies, trusts what happens when you’re going to sell a business asset sales share sale, etc. I mean, they’re very broad issues. Why don’t we talk for a minute about unanimous shareholders agreements? I think that that’s a really hot topic that gets often overlooked, particularly in spouse scenarios. I ask, Hey, do you have a USA? Do your wills align with it? How do we tie all that together When we’re talking about planning for the ownership of a private company?
Sander Van Der Wissel (34:50):
I think this is one of the biggest overlooked tools that exist in private corporations. And I think part of it is, again, back to your original comment about the cost of setting up a structure that’s overbuilt. The feeling if you have one owner and a shareholder agreement may be redundant, and it may well be because there will never be a dispute if there’s only one owner. But think about it. If you have a will that says, buy shares equally amongst my children, you might have more than one owner. And then the question becomes is how are those owners going to conduct the affairs of the corporation and deal with each other as shareholders? And that’s what shareholder agreements are for. They are to arrange how the affairs of the corporation are run, who makes the decisions, and how do you deal with your shares as an owner. And at a base level, the decision-making and the like should be very clear amongst the shareholders and the players in the corporation. So directors and officers, and that should always be spelled out in the rule book, which we call the USA.
Clayton Achen (36:09):
Interesting. Can I just park you there for a second to just, I think hit home something that you said, just to get everybody’s mind on this. So if you and I are in business absent of a USA. So if I get hit by a bus, my shares go to my kids, now you’re in business with my kids. I never signed up to be in business with my kids. You don’t want to be in business with my kids. But here you are. You’ve found yourself in the situation where you’re in business with my kids, right?
(36:38):
And maybe in a marriage situation, even I’ve seen it, I’ve seen a scenario where it’s a spouse/spouse combo. One of them passes away and the trustee who was left in charge of the estate now takes issue with the way that the other spouse is running the business. And so even in a closely related spouse scenario, the trustee of that estate or the executor of that estate has obligations that it must abide to. And if it finds that the remaining shareholder isn’t playing according to the rules that they like or the rules that conflict with their obligations, you’re going to have problems. You didn’t have the problems while the spouses were alive, maybe that’s not the issue. That’s
Sander Van Der Wissel (37:25):
Right. So, a shareholder agreement is not a waste of time. It’s certainly a good thing to have. And there are plenty, and even if there are shareholder agreements, it’s hard enough to determine exactly how those should be interpreted. But it’s better than having no rules whatsoever because if I were in business with your children, I’m sure your children would rather have the money than the shares. And so there is that question as to how do you monetize that? And that could all be prevented by having a solid USA whereby these things are discussed upfront and it’s like a prenup. You don’t want to do that when you’re fighting. You want to do that when everybody wants to be fair to each other. They deal with the buyout provisions, see how the funding is going to be accomplished, maybe insurance or whatever. All those kinds of things are things that you deal with in a shareholder agreement. So it’s so obvious. If you have people that are at arm’s length and suits business people, they will certainly want to have a shareholder agreement. But as you point out, the utility of a shareholder agreement may be even there in a less adversarial scenario.
Clayton Achen (38:49):
And I would hazard a guess, and please keep in mind that 76% of statistics, this is a fact, 76% of statistics are made up on the spot. But I would hazard a guess that 80% of my customers don’t have functional USAs in place, or at least they haven’t looked at them in 20 years. Same as we see it all the time with wills. It’s as important as your will in many cases, and they go hand in hand. So this is a pervasive issue in entrepreneur land. And as you say, it’s all fine if you pass away and everybody agrees on it, it’s all kumbaya and we’re all good, and we sell the shares and wrap it up and we’re all good, that’s fine. But it’s when there’s some contentious issue here that you wish there were a governing document and why not invest a few thousand dollars in having those discussions up front with a lawyer who can put those together for you.
Sander Van Der Wissel (39:47):
Oh, for sure, for sure. I think that that is well said. The other thing that I find is that if you have an agreement, you probably will have less likelihood of there being a dispute because everybody knows that the U S A was there for a reason to try to avoid these, and it just ups the ante as far as everybody being civil and working towards a resolution.
Clayton Achen (40:14):
Yeah. Yeah. Good point. Good point. Okay, well let’s put a pin in it there. Thank you so much for making time to come on and talk about the lifecycle of a corporation, Sander.
Sander Van Der Wissel (40:39):
Yeah, thank you. Thank you for having me.
Show notes:
VAN DER WISSEL LAW FIRM – Tax Planning, Trusts, Wills and Estates (vdwlaw.ca)
