Plan ahead for the continuation of your business upon the death or retirement of an owner with this Shareholder Buy-Sell Agreement (Promissory Note Method) for Canadian companies.
- Under this Agreement, the corporation holds life insurance policies on each of the shareholders and uses the proceeds to redeem and acquire its own shares from a deceased shareholder's estate.
- If a shareholder dies, the surviving shareholders can purchase the deceased's shares on a pro rata basis (proportionate to their current shareholdings) by issuing the corporation a promissory note for the purchase price.
- The corporation will loan the purchaser the amount of the purchase price from the insurance proceeds, and then makes an election for a deemed dividend to be paid from the capital dividend account if possible.
- This Agreement is governed by Canadian income tax laws.
This Canada Shareholder Buy-Sell Agreement (Promissory Note Method) is available as a fully editable legal document template.
BUY-SELL AGREEMENT (CORPORATE-OWNED INSURANCE – PROMISSORY NOTE METHOD) (for use in Canada, pursuant to the Income Tax Act (Canada)) THIS AGREEMENT made effective as of the _____ day of ______________, _______. BETWEEN: (list of shareholders) of the __________ of ________________, in the Province of ____________ (collectively the “Shareholders” and individually as a “Shareholder”) - and - [CORPORATION] a/an ___________ corporation incorporated pursuant to the laws of the Province of ____________________ (the “Corporation”) WHEREAS: A. The authorized capital of CORPORATION is divided into _______ common shares, of which _____ common shares have been issued and are outstanding as fully paid and non-assessable shares in the capital of the Corporation. B. The Shareholders are the registered and beneficial owners of the following issued and outstanding common shares in the capital of the Corporation: (list shareholders and number of shares held by each) C. The Shareholders desire to set out in writing their agreement as to the purchase of the shares of a Shareholder in the event of the death of that Shareholder. NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual covenants and premises contained in this Agreement, the parties hereby for themselves, their respective heirs, executors, administrators, successors and assigns agree as follows: 1. Definitions 1.1 In this Agreement, unless there is something contained within the subject matter or context that would provide a further definition, the following terms shall be defined as follows: (a) “Act” means the [applicable legislation], unless otherwise indicated, as amended and re-enacted from time to time; (b) “Agreement” means this Agreement including all schedules and exhibits hereto and includes all agreements made at any time and from time to time which amend or supplement or restate this Agreement or any provision hereof; (c) “Capital of the Corporation” means the aggregate of contribution made by the Shareholders in the existing Corporation; -2- (d) “Immediate Family” means, with respect to an individual Shareholder, the Shareholder’s spouse, common law spouse, natural or adopted children, natural grandchildren or a child legally adopted by the natural or adopted child of the Shareholder such that the child is considered a grandchild of the Shareholder; (e) “Income Tax Act” means the Income Tax Act (Canada), as amended and re-enacted from time to time; (f) “Insurance Proceeds” means the amount to be received upon the death of a Shareholder as set out in Schedule “B” hereto; (g) “Party” and “Parties” means a party to this Agreement and shall include any person who becomes bound by this Agreement, and any reference to a Party shall include such Party’s successors, heirs, executors and permitted assigns; (h) “Permitted Transfer” means a transfer of shares including any sale, exchange, transfer, gift, transmission or other transaction, by which the legal or beneficial ownership of, or a security interest or other interest in, such shares passes from one person to another, or to the same person in a different capacity, or to the personal representative of a deceased Shareholder for so long as the shares continue to be held by the personal representative of such Shareholder, and “Transfer” and “Transferred” and similar expressions have corresponding meanings; (i) “Shares” means the common shares of the Corporation; (j) “Shareholder” means at any time a person that is or becomes a Party to this Agreement and holds one or more Shares and shall include any personal representative of a deceased Shareholder; (k) [“Triggering Event” means death, disability, retirement, bankruptcy, disagreement or termination of employment of a Shareholder;] (l) “Value” means the fair market value of the Shares as determined in accordance with the provisions of paragraph [no.] hereof. 2. Restrictions on Disposition of Shares 2.1 Except as provided under the terms of this Agreement, no Shareholder shall without the prior written consent of the other Shareholders, sell, assign, transfer, gift, pledge, mortgage, hypothecate, charge or otherwise transfer or encumber any of the Shares in the Capital of the Corporation now or hereafter owned by such Shareholder. 2.2 In the case of any Permitted Transfer, no Shareholder shall sell any of his/her Shares unless the purchaser is already a Party to this Agreement or becomes a Party to this Agreement upon completion of the Transfer or enters into an agreement with substantially the same terms and conditions. 2.3 Notwithstanding the foregoing, the foregoing restrictions shall not apply to a Transfer of Shares in the Capital of the Corporation whether during the Shareholder’s life or as a result of his/her subsequent death to a member of such Shareholder’s Immediate Family, nominees of such Shareholder, a corporation owned or controlled by such Shareholder or a member of such Shareholder’s Immediate Family, or any trust which may be established for the benefit of such Shareholder or a member of his/her Immediate Family, provided that at the time of any such Transfer, any successor shall in writing agree to be bound by the terms and provisions of this Agreement and further provided that in the event of a -3- Transfer of Shares to a corporation owned or controlled by a Shareholder or his/her Immediate Family, the Shareholder shall covenant not to transfer the shares of such transferee corporation except in accordance with the provisions of this Agreement. 3. Buy-Sell Provisions on Death of a Shareholder 3.1 Upon the death of any Shareholder (the “Deceased Shareholder”), and prior to any declaration of dividends by the Corporation, the surviving Shareholder(s) (the “Surviving Shareholders”) shall, within 180 days of the date of the date of death, purchase all of the Shares of the Deceased Shareholder, for their fair market value (“FMV”), such FMV to be calculated pursuant to paragraph [no.] hereof, pro rata based proportionately on each Shareholder’s respective shareholdings in the Corporation and upon the terms and conditions contained herein. 3.2 At the time of such purchase, each Surviving Shareholder shall provide the personal representative (“Personal Representative”) of the Deceased Shareholder with a promissory note in an amount sufficient to pay the full amount for such Surviving Shareholder’s purchase of his/her proportionate number of Shares in accordance with paragraph 3.1. Such promissory note shall bear interest at a rate equal to the prime rate of the [Bank] as at the issue date of the promissory note. and shall be due and payable before the expiry of ______ days from the date of its issue. Upon receipt of the promissory note, the Personal Representative shall cause the subject Shares to be transferred to the Surviving Shareholders within a reasonable period of time. 3.3 The Corporation shall, in a timely manner, arrange to collect all of the life insurance proceeds payable to the Corporation as a result of the Deceased Shareholder’s death. 3.4 When the disposition of the Deceased Shareholder’s Shares has been completed, the Surviving Shareholders shall cause the Corporation to pay a capital dividend to the extent of the credit to the capital dividend account caused by the collection of the insurance proceeds. The Surviving Shareholders shall then use the funds so received to satisfy the debts evidenced by their promissory notes and the Personal Representative shall cancel the promissory notes evidencing such debt. In the event the capital dividend account of the Corporation is insufficient to permit the full repayment of the promissory notes, the provisions of paragraph [no.] shall govern. Transfer of Shares to Spouse # Notwithstanding any other provisions of this Agreement and in the event the mandatory provisions herein will not apply, any Shares in the Capital of the Corporation held by the Deceased Shareholder immediately prior to death may be transmitted, transferred or distributed to the spouse of the Deceased Shareholder from the Deceased Shareholder’s estate, in such manner as the Deceased Shareholder’s Personal Representative in his/her sole discretion deems appropriate. Put and Call Option #. Upon the death of a Shareholder (the “Deceased Shareholder”), the Deceased Shareholder’s spouse (the “Vendor”) shall have the option, exercisable by notice in writing within ________ days of the date of the death of the Deceased Shareholder, but shall not be obligated, to sell (the “Sale Option”) to the Surviving Shareholders (the “Purchasers”) all of the Shares in the Capital of the Corporation then owned or controlled by the Vendor (the “Option Shares”) and upon the exercise of the Sale Option, the Purchasers shall purchase all of the Option Shares pro rata in proportion to the number of shares each Shareholder holds in the aggregate number of issued and outstanding Shares in the Capital of the Corporation on the date of closing, and subject to the purchase price and terms and conditions hereinafter set forth. -4- #. Upon the death of a Shareholder, the Purchasers shall have the option (the “Purchase Option”) exercisable by notice in writing within ____ days of the date of death of the Deceased Shareholder but subject to the Sale Option, not the obligation, to purchase from the Vendor the Option Shares and upon the exercise of such Purchase Option, the Vendor shall sell the Option Shares to the Purchasers pro rata in proportion to the number of shares each Shareholder holds in the aggregate number of issued and outstanding Shares in the Capital of the Corporation on the date of closing, and subject to the purchase price and terms and conditions hereinafter set forth. 4. Valuation of Shares 4.1 The Shareholders agree that, as of the date hereof, the fair market value of each Share is $_______________. OR 4.1 Within _____ days following the fiscal year end of the Corporation, and from time to time whenever all Parties to this Agreement so agree, the Shareholders may agree upon a new fair market value or shall continue the existing fair market value for each Share and shall record any change in the fair market value or any agreement to continue the existing fair market value by executing a document in substantially the same form as Schedule “A” attached hereto. OR 4.1 The Shareholders shall on an annual basis in accordance with the Corporation’s fiscal year end, monitor and agree on the value of the issued Shares and properly record any changes in the fair market value of the Shares by executing a document in substantially the same form as Schedule “A” attached hereto, and shall file such executed form in the Corporation’s Minute Book. If the Shareholders are unable to agree upon the fair market value of the Shares, the fair market value shall be determined by arbitration as hereinafter set out. OR 4.1 Within ______ days following the date of the death of the deceased Shareholder, the Corporation’s auditors shall determine the fair market value, as at such date of death. The fair market value shall be determined in accordance with such generally accepted valuation procedures as the auditors determine to be appropriate in the circumstances, provided that the fair market value shall be determined without regard to: (a) the death of the deceased Shareholder or any effect that such event may have on the Corporation or the value of any class of shares in the Capital of the Corporation, and (b) any Insurance Proceeds received or receivable by the Corporation under any life insurance policy on the life of the deceased Shareholder. OR 4.1 Within _____ days after the fiscal year end of the Corporation, the fair market value for each Share shall be determined by the accountant engaged by the Corporation in accordance with generally accepted valuation methods in regard to the following formula: (formula) -5- OR 4.1 In the event that the Shareholders are unable to agree on the fair market value of the Shares, then within _____ days of determining a dispute exists, each Shareholder shall provide to the other Shareholders, a written list of ______ business valuators and shall from the respective lists select one (1) valuator to determine the value of the Shares in accordance with generally accepted valuation methods. If the Parties are unable to agree upon a valuator, the Corporation’s accountants shall select a valuator from the lists of each Shareholder, and such selection shall be final and binding upon the Parties. Within ____ days of appointment but prior to selecting the valuation method to be used, the valuator shall provide the Shareholders with information regarding the method to be employed and the cost associated with the preparation of the business valuation. The Shareholders shall then by resolution accept the valuation approach and costs associated with same or obtain further particulars from the valuator so that an approach and cost can be agreed upon by all the Shareholders. The costs associated with the preparation of the business valuation shall be borne by the Shareholders each according to the proportion of his/her respective shareholdings in the Corporation. 4.2 The Parties hereto covenant and agree that in the event that any governmental taxing authority having jurisdiction shall at any time determine that the fair market value of the purchased Shares is greater or less than the purchase price of the purchased Shares, the “Vendor” (defined as the spouse, authorized agent, personal representative, nominee of the Deceased Shareholder, a corporation owned and controlled by the Deceased Shareholder or an individual to whom the Shares are bequeathed under the provisions of the Deceased Shareholder’s will) or the “Purchaser” (defined as the Corporation and/or the Surviving Shareholders) shall be entitled to serve notice on the other Party by mailing such notice by personal delivery or prepaid registered post to the last known address of the other Party, requiring that Party to meet within a reasonable time after service of such notice. At such meeting, the Parties covenant and agree to negotiate in good faith the readjustment of the fair market value of the purchase price. In the event that the Parties shall agree upon a readjustment as aforesaid within ______ days after service of such notice, the purchase price of the purchased Shares shall be automatically adjusted as subsequently determined by the Parties, and the Parties agree to make all adjustments necessary to give effect to the foregoing. In the event that the Parties are unable to agree upon such adjustment, the fair market value of the purchased Shares, and consequently its purchase price, shall be determined by an independent valuator if the Parties can agree upon one. In the event that the Parties are unable to agree upon a valuator within a period of ______ days after the service of such notice, then a valuator shall be appointed on the application of any of the Parties to the [court having jurisdiction]. The determination of the valuator shall be final and binding upon the Parties. 4.3 The Surviving Shareholders shall be entitled to contest in the name of the Deceased Shareholder’s estate any assessment or proposed assessment by the Minister of National or Provincial Revenue on the basis that the value of the Deceased Shareholder’s Shares is greater than the fair market value as determined in accordance wit
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