Monday, February 18, 2013
Someone online posed an interesting question: Could an individual and spouse jointly own shares of a private corporation?
I had never seen it in practice, never seen it discussed nor come across it in any case law. There are many instances where bank accounts and brokerage accounts are set up as joint accounts and real estate is often held jointly. Why not shares? There appears to be no reason why it can’t happen.
What does it mean to own the shares jointly?
If the couple jointly own the shares, the couple each owns a severable, equal interest in the shares. Thus, if they owned 100 shares, the title could be severed and each own 50 shares.
On death, the surviving spouse would own all the shares. The Ontario Business Corporations Act (RSO 1990, c B.16) addresses this matter in subsection 67(6).
(6) Where a security is issued to several persons as joint holders, upon satisfactory proof of the death of one joint holder, the corporation may treat the surviving joint holders as owner of the security. R.S.O. 1990, c. B.16, s. 67 (6); 2006, c. 8, s. 117 (5).
In this sense the owners are joint tenants with the right of survivorship (JTWROS).
Since the transfer occurs without a will, the property is not subject to probate. In Ontario, probate fees for shares of a private corporation are normally avoided by having a secondary will, one that isn’t probated, or by using trusts.
Jointly owning shares could be a more cost effective method of reducing probate fees but should not be the primary objective for doing so.
Rollover on Death.
Normally, subsection 70(5) of the Income Tax Act deems an individual who dies to have disposed of all capital property at fair market value; however, since the these shares would pass to the individual’s spouse, subsection 70(6) provides an exclusion to the deemed disposition. The surviving spouse would be subject to tax on the unrealized gains of the shares.
Voting The Shares.
Section 102(4) of the OBCA deals with casting votes on jointly held shares.
(4) Unless the by-laws otherwise provide, where two or more persons hold shares jointly, one of those holders present at a meeting of shareholders may in the absence of the others vote the shares, but if two or more of those persons are present, in person or by proxy, they shall vote as one on the shares jointly held by them. R.S.O. 1990, c. B.16, s. 102 (4).
Where control of the corporation is an issue, an agreement between the spouses could explicitly state their intentions on how the shares should be voted.
Taxing Gains and Income.
The shares would be subject to the attribution rules for spouses and, depending on the circumstances, gains and income could be attributed back to one spouse and not taxed in the hands of the other.
Scenario one. If shares are are issued from treasury for a nominal amount and each spouse contributes their own funds to purchase the shares then the attribution rules would not apply.
Scenario two. An individual owns all the share of a corporation with a potential capital gain. The spouse could receive a joint interest in the shares by way of a gift and, provided no election is made under subsection 73(1), the transfer would happen at cost, that is, no capital gain; however, the attribution rules would apply.
1. A reference to spouse includes a common-law partner as defined in the Income Tax Act.
2. Joint ownership of shares of a private corporation can be done with any two persons, however, from an estate planning point of view such an arrangement can result in any of a number of negative consequences.