Joint Ownership of Shares In A Private Corporation

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).

Joint holders

(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).

Avoiding probate.

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.

Notes.

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.

For Lack of Evidence Allowable Business Investment Loss Denied

Wednesday, February 13, 2013

Case Citation

Stinson v. The Queen (2013 TCC 22) [TCC] [CanLII]

Summary

A taxpayer sought to deduct an allowable business investment loss (ABIL) and the deduction was disallowed. The case doesn’t revolve around the fine points of law concerning what is or isn’t an ABIL but the believability of the evidence (or lack of it) put forth by the plaintiff. While the judge did not use the word sham, he may have thought of it in dismissing the appeal.

I find it interesting to see how in one case a judge will discount a plaintiff’s testimony while accept others. The words of the decision can’t capture the court proceedings and the smell test one uses. Is this taxpayer earnest and forthright or cagy and deceitful? Many cases rest on this question.

If you are wondering what an ABIL is and why it matters, here goes.

For the most part, an investment in a corporation, through shares or debt, is usually considered capital property and any loss from its disposition results in a capital loss. Capital loss can only be applied against capital gains. Enter the ABIL—a special type of capital loss in that it can be used to reduce all sources of income not just capital gains.

What is an ABIL? It is one-half of one’s business investment loss (BIL). The one-half being the inclusion rate for capital gains or loss or a BIL.

So what is a BIL? Without getting bogged down in technical details, it’s a loss on shares or debt of a small business corporation (SBC). This leads into the definition of an SBC—a Canadian-controlled private corporation (CCPC) carrying on an active business.

The progression continues onto what is a CCPC or active business etc.

The point to remember is an ABIL is more beneficial in reducing taxes than a regular capital loss provided that is what happens and you have evidence to support your claim.

Issue

[1] The appellant, Deane Stinson, appeals an assessment made under the Income Tax Act that disallowed a deduction for an allowable business investment loss (ABIL) claimed in the 2008 taxation year.

[8] The issue in this appeal is whether the appellant incurred an ABIL on December 31, 2008 on the basis that his loans to Tille were uncollectible at that time.

ITA / ETA

| 39(1)(c) “business investment loss” | | 50(1)—Debts established to be bad debts and shares of bankrupt corporation | | 248(1) “small business corporation” |

Cases Cited

None.

Analysis

[10] The respondent submits that claim of the ABIL was properly disallowed on the basis of any one of the following:

(a) Tille was not a small business corporation at any time in 2008,

(b) the appellant had not made any loans to Tille, and

(c) the appellant has not established that any loans became bad debts in 2008.

[11] I would first comment that the appellant’s case depends in large part on his own self-interested testimony and on a limited number of documents that were within the appellant’s control. I have found that there is insufficient documentation to establish the ABIL, and that and (sic) the appellant’s testimony and some of the documents entered into evidence are not reliable.

[13] As for the documents that were entered into evidence, I have concluded that some of the key documents are not reliable. For example,

(a) The appellant provided to the Canada Revenue Agency (CRA) promissory notes evidencing the debt that were purportedly signed by one of the new owners of Tille. The reliability of the notes is doubtful because there are different versions of the notes that have different wording and also different signatures.

(b) The purported demand for payment made by the appellant (Ex. A-11) states an amount owing that does not correspond with the other evidence.

(c) The purported change of ownership on December 12 and 20, 2008 whereby shares were transferred to unrelated persons (evidenced by a hand-written shareholders’ ledger) is inconsistent with a statement made by the appellant in Tille’s corporate tax return for the year ended April 30, 2009 that his sons were the only shareholders. The ownership by the sons is also reflected in an ABIL questionnaire that was provided to the CRA on January 31, 2011.

(d) The appellant submitted a list of employees to the CRA which attempts to establish that Tille had at least five full time employees. The evidence surrounding these employment relationships was implausible.

[15] The problems with the evidence were so profound that the relevant facts regarding the ABIL claim cannot be determined.

Decision

[16] I would conclude that the appeal should be dismissed on the ground that the appellant has failed to establish, even on a prima facie basis, that any debts became bad in 2008. In particular, I am not satisfied that any shares of Tille were acquired by unrelated persons in 2008, or that any debts owing to the appellant in 2008 became uncollectible in that year.

[17] The appeal will be dismissed.

Note

A paragraph beginning with a number in square brackets is a direct quote from the case.