Private Corporation “Liquidity”

“Liquidity” means the capacity of a shareholder to liquidate his interest in a corporation.  In a publicly traded corporation, a shareholder can place his shares with a broker for a trade in a stock exchange and receive the market value of his shares.

By stark contrast, not only are the majority of corporations in Ontario “private” corporations (which means not on any stock exchange), but in addition, there is no certainty of “liquidity”.

In the absence of one or two exceptions, a shareholder in a private corporation has no right to require a corporation or fellow shareholders or any third party to buy out his shares.  Essentially, if the “bloom falls off the rose” in a private corporation, a shareholder, who seeks to exit, has no capacity to get paid out either his original investment or any value of his shareholdings.

That’s one of the main reasons why most commercial lawyers recommend “Unanimous Shareholder Agreements” (a “USA”) which could provide for the liquidity that is not available generally to any investor in a private corporation.  A USA can provide for resolutions of shareholder disputes and potential “liquidity” for a shareholder who desires to leave the entity by way of “shot-gun” clauses, “puts” or “redemption”.

Shareholder disputes involving a shareholder who wishes to leave the corporation for whatever reason are extremely difficult to resolve and can be fraught with the same emotional attachments arising in matrimonial breakdown.  There is a parallel with a loss of trust and confidence and a desire to go separate ways.

So, starting from the proposition that there are no rights of a shareholder to require either other shareholders or the corporation to allow a shareholder to exit with a repayment of shareholder loans, repayment of share purchase price, division of spoils, fair market value or a share of the assets of the corporation, negotiating, on behalf of a shareholder who wishes to leave, necessitates pressure on the remaining shareholders. In the absence of a fair and reasonable resolution, the shareholder seeking to depart may have to initiate a process potentially causing or resulting in the dissolution or wind-up of the corporation.  In the absence of justification (such as, oppression, inappropriate behaviour, or conduct justifying the shareholder desiring to leave being protected by the Courts), liquidity is far from certain.

This is reinforcement for the proposition that:

  1. When you invest in a private corporation, recognize that your investment may never be realized, regardless of the success of the business; and
  2. When you get in, figure how you are going to get out.  And get it in print.

Land Purchase Options

It’s not infrequent that commercial tenants have options in their leases to purchase either contiguous property or even the subject matter property of the Lease.  The issue is: What can be set out in the option at the time of its creation that makes the option fully capable of being enforced?

There is a relatively simple process to eliminate this disadvantage to the “Tenant” who holds the “option to purchase”.  The document comprising the option can expressly state what the option amount should be by way of a ratio to a third party purchaser or alternatively a purchase price which is good for a period of time and thereafter subject to an index such as the consumers price index.

It is equally conceivable that the land owner who is subject to an option to purchase in favour of his tenant, may never have had the option registered on title and might very well sell the property to a third party who, of course, takes subject to the Lease on the property where there is actual notice that the Lease exists.

That is hardly secure for the Tenant of property which includes an option to purchase.  Valuation is always critical with respect to exercising an option to purchase.

The Take-away:  My suggestion is that the option expressed in the principal document (Lease or other business relationship) sets out precisely what the terms for exercising the option are and the terms for the purchase of the optioned lands, possibly using a factor or a multiple of the existing Lease and at the minimum some form of correlation to the method of calculating the value of the principal property that is under Lease using square footage.  Simply leaving the price and payment requirements to be determined later merely exposes the option to abuse.

We’ve had too many cases where the option grants to the Tenant the right to purchase but the land owner demands far more than realistic.  Options should specify fully what it is to mean and how much.

Estate Administration Tax – Early Payment and Recent Reforms


As you may know, the appetite of persons to be the Estate Trustee of an Estate has been significantly dissipated as the result of recent changes relating to obligations for the payment of Estate Administration Tax.  In an abbreviated form, the Estate Trustee/Executor named in the Will has a responsibility to report to the Minister of Finance, Ontario, within 90 days following the issuance of “Probate” by way of an Estate Administration Tax Return.  The Return must report exactly what is due by the Estate and the Beneficiaries for “Probate Fees” on the Estate.  The penalties to the Estate Trustee for failing to report or to under report are personal.  Both penal and financial. Yet the Estate Trustee, himself/herself, may never receive any compensation whatever for assuming the personal liability.

So here is the abbreviated version: Estate Administration Tax is payable at the moment of the Application for “Probate” either with or without a Will.  Regardless of the time it takes to obtain “Probate” (variously, on average, 6 weeks to 12 weeks), the Estate Trustee as Applicant for Probate has a personal responsibility to both the Beneficiaries as well as to the various levels of government.  Accurate reporting of the value of the Estate upon which the calculation is made for the payment of the Estate Administration Tax is critical.

But here is the reality: To overpay Estate Administration Tax at the time of application gives rise to an entitlement for an application for refund of the overpayment.  The problem is that the overpayment will take at least 6 months and maybe as much as a year to obtain back from the government.  They like to receive the money; they just don’t like to pay it out.

Accordingly, I strongly encourage the underpayment of the Estate Administration Tax at the time of the filing of the Application.  If it turns out that the assets of the Estate are higher than what was initially submitted at the time of the filing of the Application, simply pay the surplus that was not included earlier.  No requirement for Refund.  No 6-10 months waiting.  Remember there is still, within 90 days following the date of the issuance of the Certificate of Appointment of Estate Trustee the necessity to file the Estate Administration Tax Return with the Minister of Finance but even that can be done based upon the original valuation and “topped-up” later.

Here’s an example: Gentleman Matthew dies intestate (without a Will) in 2014 leaving wife and daughter but owning at the date of death shares in a privately held Corporation the value of which is largely not capable of being determined until either the remaining Shareholders buy out the Estate or the shares are sold to a third party or potentially the entire business is sold to a third party.

The widow makes Application for Probate by way of a Certificate of Appointment of Estate Trustee without Will which was granted but only upon payment of the Estate Administration Tax estimated by the widow at the top end of what could potentially be the value of Matthew’s 60% shares in his Company.

It turned out that the estimate was significantly higher than the actual value achieved years later upon the sale of the Estate’s shares.

A large refund was requested upon the overpayment of the Estate Administration Tax paid at the time of the Application (which was necessary in order to permit the widow to even deal with the Estate and all the other items within the Estate). 

The Application for refund was filed in March 2016 and eventually in September 2016, the Court finally got around to issuing a refund.  In the interval, the widow, who did not have any other source of income, has overpaid the Estate Administration Tax from resources that could well have been spent better in underwriting the surviving family members.

The take-away:  I strongly recommend that the Estate Administration Tax be understated upon its payment. That takes nothing away from the obligations of the Estate Trustee to provide a payment of the Estate Administration Tax as finally determined based upon the value of the assets as eventually determined.

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