Shareholder Agreement Template for Ontario and Federal Corporations, With the Tax Consequences Explained

What a shareholder agreement is

A contract among shareholders

An ordinary shareholder agreement is a private contract. The articles and by-laws set voting and director powers; the agreement sets price, timing and who buys whom.

The unanimous shareholder agreement

Subsection 146(1) of the Canada Business Corporations Act validates a written agreement among all shareholders that restricts the directors’ powers. Under subsection 146(5) a shareholder given a director’s power takes on the director’s duties and liabilities, and under subsection 146(3) a person who acquires the shares is deemed a party. Ontario has the equivalent in section 108 of the Business Corporations Act.

Kept in the minute book, never filed

No registry takes a filing for a shareholder agreement. Paragraph 20(1)(a) of the Canada Business Corporations Act requires a unanimous shareholder agreement to be kept with the articles and by-laws. See our minute book service.

Share transfer restrictions

Stated in the articles

Paragraph 6(1)(d) of the Canada Business Corporations Act requires any restriction on the issue, transfer or ownership of shares to be set out in the articles.

Noted on the certificate

Under subsection 49(8), a restriction does not bind a transferee who has no actual knowledge of it unless it, or a reference to it, is noted conspicuously on the certificate.

First refusal and permitted transfers

A right of first refusal gives the other shareholders the first chance to buy. Permitted transfers, for example to a shareholder’s own holding company or to family, are listed so they do not trigger it.

The shotgun clause

How it works

One shareholder names a price per share. The other must either sell at that price or buy the offeror’s shares at the same price.

Why cash decides it

The clause assumes both sides can raise the money. In practice the shareholder with better access to cash controls the outcome, whoever fires first.

Periods and deposit

The template states the notice period, the deposit and the closing period as numbers, not blanks.

When it is the wrong tool

Between a majority and a minority, or partners with very different means, a shotgun can be unfair, and another exit mechanism usually suits better.

Drag-along and tag-along rights

Drag-along

Lets a selling majority force the minority to sell on the same terms, so a buyer can acquire 100 percent.

Tag-along

Lets the minority insist on joining the majority’s sale at the same price.

The threshold

The trigger percentage does more work than any wording around it. Where a sale is expected to use the lifetime capital gains exemption, the clause is tested against the exemption’s conditions first.

Valuation and deadlock

Fixed price, formula or valuator

A fixed price is cheap but goes stale; a formula needs defined earnings; an independent valuation by a Chartered Business Valuator is accurate but costs more when it is triggered.

The stale fixed price

The most common defect we find is a price signed once and never reviewed while the business grew. On a death, subsection 70(5) of the Income Tax Act deems a disposition at fair market value, and the CRA is not bound by a price the shareholders set themselves.

Deadlock between 50 and 50

Without a clause the only routes left are court applications, such as an oppression application under section 241 of the Canada Business Corporations Act or section 248 of the Ontario Act. A clause that escalates to mediation and then a buy-sell trigger costs far less.

Life insurance funding

Corporate-owned or criss-cross

The corporation can own a policy on each shareholder, or each shareholder can own a policy on the other. We explain the tax; a licensed life agent sells the policy.

The capital dividend account

Where the corporation receives the death benefit, paragraph (d) of the capital dividend account definition in subsection 89(1) of the Income Tax Act adds the benefit less the policy’s adjusted cost basis, which can be paid out as a tax-free capital dividend.

Stop-loss and the estate

Subsection 112(3.2) can reduce a loss the estate realizes on a redemption by capital dividends received, and subsection 164(6) lets the estate carry a first-year loss back to the deceased’s final return. We compare a redemption with a purchase by the survivor in writing.

Our guide to what a CPA checks in a shareholder agreement and our guide to the tax on split income go further on the tax side.