Recently, we have done a lot of probate applications for families without a Will. When distributing their corporate assets, the process became very difficult due to 2 reasons. First, some families do not have a complete corporate minute book, which shows who owns the company. Shareholder information is not registered and is meant to be private, so we cannot look up this information for them.
Second, because those families did not have a secondary or corporate will, their business interests must pass through probate. But if they did do a corporate will before, then their companies are not subject to probate and can pass immediately to their beneficiaries without paying probate taxes.
Thus, it’s clear that having a complete corporate minute book and a secondary will is immensely beneficial to your estate planning.
What is a corporate minute book?
In general, there are 2 types of corporate documents: registered documents and other documents. Registered documents will include details such as the company’s name, its address, who are the directors, and what are its class shares. If those documents are lost, one can always request another copy from the government by paying a small fee.
But the other documents, which form your corporate minute book, are not registered. If lost, there is really no good way to retrieve them. Those documents show who are the shareholders (owners of the corporation), the shares issued, decisions made, and corporate assets & debts.
You should have a corporate minute book made as soon as you incorporate your company and it should be kept up to date. If a shareholder passes away without a corporate minute book, then it’d be extremely difficult to ascertain who owns the company.
Secondary Will
If you have completed a secondary or corporate will, then your corporate assets can pass without probate – your beneficiaries do not need to pay probate taxes and can receive those assets immediately.
This can also save them the hassle of having to do share valuations. If business interests are passing through probate, then the executor must determine how much the shares are worth – sometimes requiring a professional appraiser, who is very expensive.
It is best to get your minute book and corporate will done at the same law firm to avoid any inconsistencies. If a shareholder left all his shares to his son in the corporate will, but in his corporate minute book there are share transfer restrictions, then it would be trouble. For instance, in his corporate minute book, there is a rule that requires 70% of shareholders to agree before shares can be transferred. This goes directly against his corporate will – mad this inconsistency is hard to resolve. It will likely lead to stalemate in estate distribution, or even nasty arguments and litigation with existing shareholders.
What about terminal income taxes?
Other than probate taxes, you also need to plan for terminal taxes – this is the income taxes that the deceased or the estate must pay for the year he/she passed away.
The problem with terminal taxes is that CRA considers all of the estate assets as sold to the beneficiaries at fair market value. Thus, the estate must pay income taxes on those gains. So instead of deferring your income taxes by leaving money in the corporation, now the opposite happens: everything in the corporation is given to your beneficiary all at once. This may result in a huge terminal tax.
A corporate will can help with this – instead of giving your beneficiary everything in the corporation all at once, you can instead direct that the beneficiary become a shareholder and a director. Thereafter, the beneficiary can issue him/herself shares gradually – a portion each year –instead of all at once.
Alternatively, you can use a trust to achieve the same thing – the assets in the trust can be distributed to the beneficiaries gradually by the trustee.
Another huge plus is that the assets in the corporate will and the trust are both exempt from probate taxes.
Although the estate need to pay terminal taxes, once the assets are distributed to the beneficiaries, they get it tax free, yay!
Conclusion
Having a well-drafted corporate minute book and corporate will are essential to your estate planning. The assets in your corporate will are exempt from probate and probate taxes – making the estate process a much cheaper, shorter, and less-agonizing experience for your beneficiaries.
For anyone who have questions regarding your estate planning and corporate structures, please email hello@varitylaw.ca or call 905-597-9357 to book an initial free consultation with us.
