Buy Sell Agreements Tax Implications

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					                                                                                 Practice Management

 Buy-Sell Agreements: Tax Implications
                                           JOHN K. FENTON, CA

ESTATE TAXES AND SUCCESSION DUTIES may     bring undue     federal estate tax and Ontario succession duties
hardship to the beneficiary or purchaser on buy-sell       would amount to about $147,400.
agreements that are to take effect on death. The diffi-
culties may arise from a situation where the property      Liability of the Estate
i.e. shares of a privately-owned company, are to be           Let us further assume that the deceased's Will pro-
sold at a price which is less than fair market value,      vides that all death taxes are to be borne by the
and the deceased's will does not stipulate whether the     estate-a provision not uncommon in Wills. The en-
estate is liable for the death taxes payable on the dif-   tire $147,400 of estate taxes and succession duties
ference between the sale value and fair market value.      would be payable by the executors of the estate out
   In cases where a buy-sell agreement is entered into     of the $150,000 in assets under their administration.
and the sale price is equal to, or greater than, the       The burden of tax in this particular example would
fair market value, no problem should arise since the       therefore amount to about ninety-eight percent.
value for estate tax and succession                                            Under similar circumstances, but
duty purposes is simply the sale                                               using different figures, it could be
value.                                                                         demonstrated that death taxes
                                                                               could exceed the value of the
                                                                               estate, and thus leave nothing for
Sale Value                                                                     the beneficiaries under the Will.
   However, if the sale value is less
than the fair market value of the                                            Purchaser's Liability
property at the date of death, the                                             If, on the other hand, the de-
date the buy-sell agreement is to
take effect, the fair market value                        t.w'*              t
                                                                             ceased's Will contains no provi-
                                                                             sions relating to the payment of
 (not the sale value) is the amount                                     L death taxes, the purchaser under
which will be included in com-                                               the buy-sell agreement would be
                                                                         S   liable for the portion of the death
puting the taxable value for estate Mr. Fenton - a chartered ac- taxes applicable to the property
tax and succession duty purposes.     countant and a nianager with the that is deemed to have passed to
The following example illustrates firm of Thorne Gunn, Helliwell him. The property deemed to have
the results of an Ontario resident and Christensor19 - welcomes in- passed to the purchaser in the
who died and whose estate had a dividual questiions on Practice foregoing example is $200,000. In
taxable value as follows: Value of Management wlhio should be ad- this particular case, the purchaser
assets passing to beneficiaries under dressed to hitm C/O CANADIAN could find himself with an un-
the Will (including $100,000 re- FAMILY PHYSICILAD     N.                    wanted tax liability amounting to
ceivable under a buy-sell agreement taking               approximately $84,000 ($200,000/$350,000 x $147,-
effect on death and relating to shares of a              400). Whether the deceased was dealing with the pur-
privately-owned company with a fair market               chase at arm's length or not, would make no differ-
value of $300,000 at date of death)           $150,000 ence in the above results.
Add difference between fair market value of                   Anyone who is already in a buy-sell agreement or is
  shares and price payable under the buy-sell            contemplating getting into one, which is intended to
  agreement ($300,000-$100,000)                200,000 take effect on or after death and at a price which
                                              $350,000 could be less than fair market value of the property
                                                         at date of death should be careful in considering the
   If, in this example, the Will provided that all the above dangers. They would be well advised to seek
property was to pass to the deceased's brother, the legal advice on provisions in the Will relating to lia-
CANADIAN FAMILY PHYSICIAN * MARCH, 1970                                                                         113
      bility for death taxes as the law involved is quite                             Halifax-Scene of
                                                                                      Annual Assembly
      Deferred Capital Cost Allowance                                                 THE 1970 ANNUAL SCIENTIFIC ASSEM-
         When preparing your 1969 income tax return keep                              BLY of the College of Family Phy-
      in mind that any assets which were acquired in the                              sicians of Canada will take place in
      1966 taxation year and were subject to deferred capi-                           the beautiful city of Halifax-Nova
      tal cost allowance under Regulation 1107, will be                              Scotia's capital. Halifax, for many
      eligible for full capital cost allowance in the 1969                           years the principal holiday town
      taxation year. Therefore, in 1969, no "adjustments"                             in Canada, will provide a relaxing
      need to be made to the capital cost allowance sched-                           background for the Assembly and
      ule for these assets.                                                          can offer something of interest to
         Similarly, no adjustment will be necessary in a                             all its visitors.
      1970 taxation year for assets acquired in a 1967 taxa-                            Besides the ever-popular attrac-
      tion year and no adjustment whatsoever will be re-                             tions of sun, sea and golden
      quired in a 1971 year.                              4                          beaches, Halifax has much to offer
                                                                                     the visitor interested in Canada's
                                                                                        Present-day Halifax also has
                                                                                     much to offer, with its wonderful
                                                                                     seafood restaurants and modern
                                                                                     shopping centres. There is much in
                                                                                     the way of entertainment, from the
                                                                                     six movie theatres to Canada's only
                                                                                     professional repertory company at
                                                                                     the Neptune Theatre. There is
                                                                                     harness racing at Sackville Downs.
                                                                                     There-'s much to be seen in the
                                                                                     City's museums, especially the
                                                                                     Maritime Museum on the water-
                                                                                     front, where you will find the facts
                                                                                     of Nova Scotia's special history of

      Achrocidiln             Totracycline-Antihistaminrw-Analgesic Compound
                                                                                     seafaring recorded.
                                                                                        Fishing and sailing are, of course,
                                                                                     the favorite sports of visitors to
                                                                                     Halifax, and equipment for both
                                                                                     can be hired very reasonably. Many
                                                                                     visitors hire yachts to explore the
                                                                                     beautiful coastline around Halifax,
                                                                                     visiting the old fishing villages
                                                                                     which still retain an air of tran-
                                                                                     quility even though they are with-
                                                                                     in easy distance of the bustling
                                                                                     capital. In some of these villages,
                                                                                     Gaelic is still a traditional langu-
                                                                                     age, reflecting the ancestry that still
                                                                                     inspires Highland Festivals, in full
          0              Tommy Jones                              0                  traditional dress, every summer.
                         1iteaspoonful 4                                                Halifax is easily reached by air
                         times daily                          '                      or overland from almost any point
                                                                                     in Canada, and there is excellent
                         Dr. Lederle                                                 accommodation to be had in the
                        787890 1-5-70                           O m                  city. Any information can be quick-
                                                                                     ly obtained from the Halifax
                                                                                     Visitors and Conventiqn Bureau,
                                                                                     Halifax, Nova Scotia.

              Full information is available on request.

                         Montreal     *Registered Trademark

114                                                                            CANADIAN FAMILY PHYSICIAN * MARCH, 1970

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