Connect with us

Local Business

Tax – Settling a Shareholder Dispute under a Unanimous Shareholders Agreement is taxed as a Restrictive Covenant – Tax Court of Canada

Published

5 minute read

Tax – Settling a Shareholder Dispute under a Unanimous Shareholders Agreement is taxed as a Restrictive Covenant – Tax Court of Canada

By Cory G. Litzenberger, CPA, CMA, CFP, C.Mgr – President & Founder of CGL Strategic Business & Tax Advisors (CGLtax.ca)

From the WTF (Weird Tax Findings) department…

Consider this, you have three shareholders with a Unanimous Shareholder Agreement (USA) that says you can’t sell shares to a third party without consent of the other shareholders. Pretty standard stuff in agreements that I’ve seen.

Now if two of the shareholders want to sell, and one does not want to agree. What do you do?

In the Tax Court of Canada ruling in Pangea v The Queen (2018 TCC 158) that came out July 31, 2018, it became a little murkier.

The day-to-day common understanding of the Restrictive Covenant rules was that it was mainly for things like Non-Competition Agreements when selling a business, etc.

In this case, a shareholder that did not want to sell received an amount from the other shareholders. Basically, they paid him to go along with the sale of the shares and not exercise their right to veto the sale.

Now to a Canadian shareholder, such a payment could be also taxed as business income as an “inducement payment” so it really doesn’t matter the characterization. However, to a non-resident shareholder, inducement payments could be treaty exempt as business profits, but restrictive covenant payments are not. This was the case for Pangea, and why it went to court.

The commentary provided by the Tax Court of Canada however got me to thinking how far does this reach, and is there something else that could have been done?

You see, the agreement between the disputing shareholders does not have to be a formal agreement. The restrictive covenant rules say that it can be an “agreement”, “undertaking”, or “waiver of an advantage or right” whether legally enforceable OR NOT.

This wording makes me concerned.

So even if the other two shareholders, tied me up, held a gun to my head, and made me agree under duress to accept the payment and sell my shares, I would still be taxed as though I was a willing participant?

Now, this didn’t happen (I think) in this case, however, it begs the “what if” question, and brings a whole new meaning to “shotgun clause” in Unanimous Shareholder Agreements.

So what if the transaction would have been structured differently?

The interpretation by the tax court, although likely correct based on the extremely broad wording of the provisions, begs the question “what if” when viewing this scenario.

The questions below do not imply that they would have been viewed favourably by the CRA or the Tax Court Justice, but it makes me wonder how they would view it.

What if, instead of the amount being to agree, it was an outright sale of the right from Pangea to the other shareholders to veto the sale? Would the result be different? Would it be considered a disposition of property and exempted from the restrictive covenant rules? The Tax Court Justice hinted that this didn’t occur, so he does not have to consider it, but what would the ruling be if he did?

What if the purchaser agreed to pay more for the shares held by Pangea than the amount paid to other shareholders?

What if the other two shareholders assigned some of the sale proceeds directly to Pangea instead of receiving it first? Would it change the outcome?

If the two shareholders committed a criminal act (which they didn’t) in forcing Pangea to agree under duress, would the CRA and Tax Court still enforce the restrictive covenant rules? It appears that they could.

Unfortunately, this ruling raises more questions than answers with disagreeing shareholders tied to a Unanimous Shareholder Agreement trying to solve a dispute.

One can only pop some popcorn and stay tuned…

Cory G. Litzenberger, CPA, CMA, CFP, C.Mgr is the President & Founder of CGL Strategic Business & Tax Advisors; member of CPA Alberta Tax Working Group advisory panel; and recently, moderator at the 2018 Canadian Tax Foundation Prairie Provinces Tax Conference in Saskatoon, SK; and Master of Ceremonies at the 2018 Canadian Association of Farm Advisors Alberta Update

CEO | Director, Canadian Tax Advisory CGL Strategic Business & Tax Advisors With the Income Tax Act always by his side on his smart-phone, Cory has taken tax-nerd to a whole other level. His background in strategic planning, tax-efficient corporate reorganizations, business management, and financial planning bring a well-rounded approach to assist private corporations and their owners increase their wealth through the strategies that work best for them. An entrepreneur himself, Cory started CGL with the idea that he wanted to help clients adapt to the ever-changing tax and economic environment and increase their wealth through optimizing the use of tax legislation coupled with strategic business planning and financial analysis. His relaxed blue-collar approach in a traditionally white-collar industry can raise a few eyebrows, but in his own words: “People don’t pay me for my looks. My modeling career ended at birth.” More info: https://www.CGLtax.ca/Litzenberger-Cory.html

Follow Author

Business

Downtown Business Spotlight: Root 51 Salon and Spa

Published on

This week’s Business Spotlight shines on Root 51 Salon & Spa! This unique establishment is located right on 4814 51 St and offers anywhere from haircare to spa treatments to relax and pamper. We spoke with the owner to learn more about this wonderful establishment!

What is your business?
Our business is a small locally owned salon & spa.

When did your business open?
We downsized & renovated this main floor in 2016 & changed our name to Root51 (previously Techniques Hair Therapy & Day Spa in the Millennium Center for 2 decades!)

What makes your business unique?
We have asked our valued guests this same question the responses we got: our education, our flexibility to accommodate, our selection & knowledge in our top-shelf natural products for both hair & skin, our prices are extremely reasonable for the level of experience (over 30 years) & education (over 100K worth of education!!!) (in a big city I would charge 35-40% more for the same treatments), and we work hard and are very proud of this next one…our Cleanliness – often they say your place is always spotless! (even before Covid!!)

What are some products/services that you offer?
Full-service Salon hair Care & Spa treatments that are non-invasive. Michele specializes in colours, balayage & ombre, colour corrections & blondes. Smoothing treatments are in high demand for silky soft straight looks and perms for waves or more body. With 30 years of cutting hair, some guests have said “that’s the best-shaped haircut I ever had.”
Spa treatments are effective and relaxing with visible results after one treatment ~ home care is a must because maintenance is easy than correction. Our skincare line is exclusive to us in RD and is composed of sea plants and seawater with many benefits to your facial skin as well as your body and well-being!

Why did you choose Downtown Red Deer as the location for your business?
In 2000, the Millennium Center was a brand new and very central location — when we changed the location to 2 block north on 51 st ~ we wanted to be able to still cater to our professional corporate downtown business people.

What do you think makes Downtown vibrant?
I believe it’s the local entrepreneurs big & small that make downtown a vibrant place.

Website: Root 51 Official Website
Facebook: Root 51 Facebook Page

Continue Reading

Alberta

Downtown Business Spotlight: Artisan Food Market on Ross

Published on

This week’s Business Spotlight shines on Artisan Food Market on Ross! This unique restaurant is located right on Ross Street (106, 4916 Ross Street) and offers a large selection of locally made products. We spoke with the owner to learn more about this wonderful establishment!

What is your business?
Artisan Food Market on Ross is a specialty food store. We carry a large selection of local, national, and international foods and ingredients.

When did your business open?
We opened on April 1, 2020.

What makes your business unique?
We carry a large selection of local items and have a variety of frozen meals.

What are some products/services that you offer?
Customers can place orders for their favourite D Dutchmen Dairy or Black Forest German Bakery products and the requested items will get delivered to our store the following week. Additionally, customers can shop online and have their products delivered to their homes even during the times that we are closed. If a customer wishes to place an order they can simply visit us at www.ArtisanFoodMarket.ca.

Why did you choose Downtown Red Deer as the location for your business?
As a Red Deerian, I wanted to make a positive impact for our downtown by setting up a local market store right here.

What do you think makes Downtown vibrant?
I love the flower gardens at the city hall and the assortment of independent shops in our downtown core.

Finish this sentence: I love Downtown because…
It’s my home and it’s my place for adventure.

Website: Artisan Food Market on Ross Official Website
Facebook: Artisan Food Market on Ross Facebook Page
Instagram:
@artisanfoodmarket

Continue Reading

june, 2021

tue04may(may 4)4:57 pmwed30jun(jun 30)12:00 pmMove Your Mood Family Challenge (June)(may 4) 4:57 pm - (june 30) 12:00 pm

Trending

X