Many common law spouses believe that because they have been living together, they are considered married in the eyes of the law and consequently, if one common law spouse dies intestate (without a Will), the surviving one common law spouse is entitled to receive part of or the entire Estate. This is not the case.

The Succession Law Reform Act (the “SLRA”) states that if one dies without a will , married spouses are entitled to a preferential share of the estate equal to $200,000 plus 1/2 of the balance to share with the deceased child or 1/3 of the balance to share with the deceased's children. However, common law relationships of heterosexual or same sex partners, lack the same recognition as married spouses under the SLRA leaving the surviving common law spouse with no statutory right to an inheritance from their spouse’s Estate. That means if a common law spouse dies without a will, the surviving common law spouse has no entitlement to any part of the Estate.

For example consider Jack and Jill who have decided never to marry but have been living together for 15 years and have three children aged 12, 9 and 7. Unfortunately, Jack dies in a car accident leaving an estate valued at $300,000. Jack has no Will.

Because Jack and Jill were never married, Jill has no legal right to an inheritance or to property through an equalization payment and Jack’s estate will be divided equally among his three children where each would inherit $100,000 (held in trust until they have reached the age of majority). As a common law spouse, Jill can only hope to succeed in an action where she would sue the Estate seeking support as a dependent.

The above example may seem unfair but the Supreme Court of Canada in Walsh v. Bona, held that such distinction does not offend the Canadian Charter of Rights and Freedoms because the differentiation was based on the individuals’ choice of whether or not to marry.

Common law spouses who want their spouse to have a right to an inheritance in their Estate must have a valid Will.  If you or someone you know is in a common law relationship and does not have a Will, to avoid a situation such as this, it is time to consider getting one.

If you have questions regarding this issue or any other issue pertaining to Wills and Estates Planning, please contact Sebastien Desmarais at (613) 288-3220 or sdesmarais@tslawyers.ca.

Every successful business owner will one day be faced with the dilemma of having to choose a successor. Letting go of the reins of his or her business that has been built through years of labour will not be easy and a smooth succession can only be achieved if the business owner is ready to sell or pass the reins to his or her heir(s).

There is no single boilerplate for a succession plan for all businesses as every business succession is unique. However, all successful successions have similarities and I will highlight some of those similarities in this article.

BEAT THE ODDS

The statistics on small business succession are discouraging as approximately 50% of small businesses that pass to the next generation of owners remain in business five years later. The statistics concerning family owned-business are less encouraging as only 30% will survive a next generation and probably only half of those will survive to the following generation.

Although the reasons why some business successions fail while others succeed are vast and open to interpretation, lack of preparation and poor communication are common traits in many failed plans.

SHAREHOLDER AGREEMENT

Most successful entrepreneurs and professionals will agree that a shareholder agreement is important as it establishes a solid business foundation for the shareholders. The shareholder agreement can also provide the initial steps for planning the business succession as it usually maps out the structural transitions of the business in situations such as the death or disability of an owner, a marriage breakdown of a shareholder or the outcome of a feud between co-owners. Essentially, the shareholder agreement is a negotiated document between the shareholders of the business defining the relationship of the shareholders and the future succession of the business.

A well-drafted shareholder agreement provides solutions to those unfortunate situations by inserting specific clauses that pre-determine the outcome. A shareholder agreement should include clauses such as:

In our opinion, a shareholder agreement should always be part of the business succession discussion.

HAVE A PLAN

Business succession planning is a process that should be considered sooner rather than later. To achieve a smooth succession of the business it is best to develop a comprehensive plan that both achieves the retiring owner’s objectives and serves the successor’s needs.

In an ideal scenario, the business owner(s) and the “next generation” would meet with a group of professionals (accountant, lawyer and advisors) to discuss their individual goals and the various options to attain these specific goals. The design of the plan should be viewed with an open mind as compromises are inevitable and without the input of all the succession would be vulnerable.

The succession plan should address three main areas:

However, the main issue to address in any succession plan is: who is/are the successor(s) and how it will be accomplished. The answers to those questions will provide the basis for the structure of the business succession plan.

IMPLEMENTING THE PLAN

Establishing a succession plan is only the first step of the business succession; that plan must then be implemented. It is often at this stage that plans derail because of a lack of willpower on behalf of the parties or because the plans are put on the backburner.

Once a succession plan has been agreed upon, someone must take the leadership role and establish the timetable for the stages of the succession. The leader must make sure that all parties involved (owners, accountant, lawyer and advisor) are made aware of the deadlines and, more importantly, he or she must ensure those deadlines are met.

It is possible that the succession plan may change in light of unforeseeable events so the parties involved must remain flexible and open-minded. However, unless those unanticipated events jeopardize the entire succession plan (such as the death of the owner), the succession plan should only be postponed and not dismissed in its entirety.

TAX CONSEQUENCES

You must take into consideration tax consequences when implementing an estate and business succession plan.

If one voluntarily avoids preparing a business succession plan, at his or her death he or she will be deemed to have disposed of all his or her assets at fair market value potentially resulting in a significant tax debt payable by the estate and the business being left in complete disarray.

Deemed Disposition at Fair Market Value

One of the greatest concerns business owners face when planning for their estate and the business succession is how he or she can minimize the capital gains tax that will arise on the sale or other type of transfer of ownership.

As mentioned above, although avoiding the issue and letting his or her Will dictate the business succession is probably the worst choice one can make, unfortunately many owners prefer opting for this option in hopes of avoiding conflict because of the succession. If the business owner decides to leave their shares of their company to their children under their Will, they will be deemed to have disposed of these shares at fair market value triggering a capital gain which may potentially deplete the value of their Estate.

Capital Gains Exemption

Every individual resident in Canada is entitled to a lifetime capital gains exemption of up to $750,000 upon disposition of shares of a qualifying small business corporation. To qualify for the exemptions the following criteria have to be met:

1. The shares must have been owned throughout the 24 month period preceding the date the shares were disposed of;

 

2. At least 50% of the fair market value of the business’s assets must be used in the course of carrying on an active business in Canada;

 

3. At the date the shares are disposed, approximately 90% of the fair market value of the business’s assets must be used in the course of carrying on an active business in Canada.

The capital gains exemption allows the business owner to contemplate several succession strategies such as an estate freeze.

Estate Freeze

One strategy that is often mentioned is the estate freeze; a technique that limits the growth of your capital property and the resulting tax on death during your lifetime by transferring the future growth in the capital property to your heirs.

In order to protect their Estate by preventing its value to grow to a size that might incur considerable taxes and probate fees, the business owner will:

1. exchange their common shares for preferred shares of equal value where the new preferred shares would not grow; and

2. family members (wife, children and grandchildren) would be given common shares and all future growth would attach to those common shares.

An estate freeze allows for a tax deferral for a period commencing when the family members acquire the new preferred shares until the sale of those shares. The estate freeze allows the business owner to minimize the taxes arising at his death.

However, it is important to understand that an estate freeze involves major changes on the part of the business owner and the family. Several issues will also need to be addressed as a result of the freeze and we recommend that anyone who is contemplating an estate freeze consult their accountant and their lawyer in order to fully understand the implications of a freeze for the business and for the family members.

The estate freeze is the most common technique used when a business succession is contemplated but it is not the only technique. Depending on the situation, there are other techniques that are more complex and beyond the scope of this Newsletter. For more information, we recommend you consult your accountant and lawyer.

SUCCESSION OF THE FAMILY BUSINESS – A WEB OF COMPLEXITIES?

Succession of the family business is more delicate as it often involves the varying interests of the children and the parents’ concerns of being fair toward them; it is a balancing act between the realities of the business and the family.

First, one must ask whether there is a viable family successor(s). It is also important to identify the goals of that successor(s) and to develop the right succession plan in light of those goals.

Second, involving family members in the business at an early stage provides an opportunity for the next generation to familiarize themselves with the requirements of managing the business to be involved in the decision-making process. Family involvement should be a key component of the family business succession plan.

Third, it will be necessary for the family to address important and difficult issues such as management authority and family participation. The emergence of a strong corporate governance plan will only be possible if all related parties participate in the generation of the plan and all recognize their responsibility in this plan. The ultimate goal is to have the parent recognize will be in the need to pass the reins to the next generation and having confidence that business is in good hands and will continue to thrive in the future.

CONSULT WITH PROFESSIONALS

Business succession planning can strain the personal relationship of co-owners or your family members. However, maintaining the statuts quo and doing nothing is the worst option as it only postpones the issues and your legacy could be jeopardized.

Letting go is seldom easy but making well-informed decisions will make the transition less stressful and ensure your business transition results in a lasting and profitable gift. In contemplating retirement and handing the reins of your business to your successor(s), we recommend consulting with your accountant, lawyer, and any other professional advisor that may be necessary for your particular business, in order to be thoroughly advised.

REVIEW YOUR WILL

After all this planning, don’t forget to review your Will. At Tierney Stauffer LLP, we will gladly review your Will with you and discuss more advanced estate planning aimed at maximizing the value of your estate while minimizing the taxes and probate fees.

Planning the succession of your business is not easy so reduce the stress and complexities by seeking proper advice. Don’t forget that this is in your own best interests as well as the best interests of your loved ones.

If you have questions regarding this issue or any other issue pertaining to Wills and Estates Planning, please contact Sebastien Desmarais at (613) 288-3220 or sdesmarais@tslawyers.ca.

NOTE: The following French article deals with the concept of Probate and the different techniques available to minimize the probate fees. Probate is the procedure by which a Will is approved by the Court as the valid and last Will of a deceased testator.

Lorsqu’un individu décède « ab intestat » (sans testament), se sont alors les lois sur les successions qui dictent le processus à suivre concernant la distribution des biens aux héritiers. De plus il en revient à la Cour de designer un individu qui agira en tant qu’exécuteur de la succession sans testament. Vous pouvez vous imaginez qu’un tel processus peut s’avérer long, pénible et déchirant pour les membres de la famille qui sont en droit d’espérer être récipiendaires.

En revanche, si l’individu a rédigé un testament, nous devons prendre connaissance des directives et des dernières intentions exprimées dans le testament car tous les droits et les pouvoirs seront gouvernés par le testament et prendront effet au décès. Si le testament fut rédigé en bonne et due forme selon les modalités requises, alors le simple fait de s’approprier le testament original justifie son existence et sa validité.

En Ontario, le testament doit être soumis à la Cour afin qu’un « certificat de nomination à titre de fiduciaire de la succession » soit émis. Ce processus s’appelle l’homologation du testament et des frais y sont rattachés.

Peu importe si l’individu est décédé « ab intestat » ou avec un testament, il est obligatoire que les frais de la Cour (les frais d’homologation) soient payés en premier lieu.

Qu’est-ce que l’homologation :

Dans le cas d’une succession avec ou sans testament, l’exécuteur testamentaire devra soumettre les documents d’homologation à la Cour. À l’exception des biens détenus conjointement (joint ownership) avec un droit de survie (right of survivorship), l’exécuteur testamentaire de la succession devra calculer la valeur des biens personnels que possédait le testateur ainsi que tous les biens immobiliers situés en Ontario. La Cour prélèvera alors des frais sur la valeur des biens soumis à l’homologation.

Les frais d’homologation en Ontario sont calculés au taux suivant : 0.5% sera imposé sur le premier 50,000$ de la valeur de la succession et 1.5% sera imposé sur la valeur excédante.

Planifier pour minimiser les frais d’homologation

Il existe une variété d’options disponibles aux individus qui désirent réduire les frais reliés à leur succession; plus particulièrement les frais d’homologation. Les options les plus communes sont de faire un don des biens avant le décès, de transférer les biens dans une fiducie entre vifs (inter vivos trust) ou de transférer les biens détenus conjointement avec vos proches.

Les options énumérées ci-haut visent essentiellement à s’assurer que vos biens soient exclus de votre succession par le fait qu’ils seront légués aux bénéficiaires « immédiatement » à votre décès. Ainsi donc, ces biens n’auront pas à être mentionnés dans votre testament et par conséquent, ne sont pas sujet à l’homologation. L’avantage de procéder ainsi est que vous réduisez les frais d’homologation puisque les biens qui sont exclus de votre succession n’ont pas à être considérés lors de l’homologation.

Testament double (Dual Wills)

Une méthode fort efficace permettant d’éviter les frais d’homologation associés à « une simple planification successorale » est celle de rédiger un testament double. Cette technique requiert que deux testaments égaux soient rédigés; un « testament principal » couvrirait les biens faisant l’objet des frais d’homologation et le « testament secondaire » couvrirait les autres biens qui n’auraient pas à être homologués.

Pour les fins de l’homologation, les biens d’un testateur peuvent être catégorisés en trois différents groupes :

1. les biens nécessitant un document prouvant les droits de propriété et qui devra faire partie de la succession qui sera homologuée, tels des actions d’une compagnie publique, des biens immobiliers ou un compte bancaire;

2. les biens nécessitant un document prouvant les droits de propriété et qui n’aura pas à être sujet à l’homologation tels les actions d’une compagnie privée ou les dettes dues au testateur; et

3. les biens personnels qui ne requiert aucun document prouvant les droits tels les vêtements ou les œuvres d’art du testateur.

Un testament double anticipe la rédaction de deux testaments. Le « testament principal » vise les biens du premier groupe qui n’aura pas à être soumis à l’homologation alors que le « testament secondaire » qui vise les biens des deuxième et troisième groupes n’aura pas à être soumit à l’homologation.

Afin de mettre en perspective les méthodes citées ci-haut, considérons l’exemple suivant : si une personne décède avec $300,000.00 de biens personnels, une compagnie privée évaluée à $400,000.00 et un bien immobilier (chalet situé en Ontario) d’une valeur de $300,000.00. Si cette personne n’avait rédigé qu’un testament, les frais d’homologation seraient de $14,500.00. En revanche, si cette personne avait rédigé un testament double, les frais d’homologation s’élèveraient à $4,000.00, une économie de $10,500.00.

Comme toute bonne planification, vous devriez consulter un conseiller en planification successorale afin qu’il vous assiste avec l’évaluation appropriée de votre planification successorale et ce, peu importe la complexité de votre succession. Si vous avez des questions concernant cet article, n’hésitez pas à me contacter.

Si vous avez des questions concernant cet article ou votre planification successorale ou votre testament, n’hésitez pas à communiquer avec Sébastien Desmarais au numéro de téléphone suivant (613) 288-3220 ou par courriel à sdesmarais@tslawyers.ca.