Giving corporate assets by will

April 28, 2022 | Wendi P. Crowe, Julia S. Amelio

One cannot give away what one does not own. This concept is so fundamental that it should go without saying. The same is true for the principle of corporate separateness; that is, a corporation is a distinct legal person from its directors and shareholders. Few principles of law are better established than the proposition that corporate assets belong to the corporation, not the shareholder. But these ideas bear repeating, in light of conflicting case law in Canada involving gifts, by will, of assets owned by corporations.

It’s not uncommon for an individual to intend that assets held through a corporation be conveyed to one or more beneficiaries upon the individual’s death. Where the individual is the sole director and shareholder of the corporation, he or she might attempt to bequeath the corporate asset directly to the intended beneficiary in their will. Unfortunately, this approach is unlikely to work, although the Ontario Court of Appeal recently gave effect to such a gift in Trezzi v Trezzi, 2019 ONCA 978.

At the time of his passing, Peter Trezzi was the sole shareholder of Trezzi Construction Ltd. Peter’s will contained a gift of assets owned by Trezzi Construction to his son. The residuary beneficiaries of Peter’s estate argued that the gift could not be given effect, as Peter did not own these assets.

The Court held that the key is to determine the testator’s intentions in light of the surrounding circumstances. Here, it was Peter’s clear intention to leave all of the corporate assets to the named beneficiaries, leaving Trezzi Construction with nothing. The Court found that Peter had turned his mind to this issue and imparted an intention for the executors to wind up the corporation and distribute the assets.

The result in Trezzi surprised estate planning advisors in Alberta, because Alberta courts have consistently refused to give effect to gifts of corporate assets in wills. In Re Meier (Estate of), 2004 ABQB 352, the testator was the sole shareholder and director of Meier Auctions Ltd. The will included a gift of farmland owned by Meier Auctions Ltd. to Robert Meier, the testator’s brother. Robert argued that, despite the corporation being the legal owner of the land, the testator was the beneficial owner so the gift should be allowed.

The testator’s intentions were certainly clear: he intended to give the farmland to his brother. However, the Court held that the corporation, not the testator, owned the assets and a testator cannot gift what they do not own. As such, the gift of farmland failed.

In Oryshchuk Estate, 2009 ABQB 688, the Court came to the same conclusion. The testator left a holograph will bequeathing several “business assets” owned by his trucking company, including “my company bank account under the name of B.J. Trucking Div of 404169 Alberta Ltd.”, as well as certain land and equipment, and “the balance of my equipment operating as B.J. Trucking.”

At para. 35 the Court confirmed that a shareholder only owns the shares of the corporation, which gives them a measure of control over the corporation’s assets, but this does not equate to ownership of the assets themselves: “Where the corporation is owned by a single shareholder, the lines between what is personal and what is corporate may be blurred in the mind of that shareholder, but they are not blurred in law.”

Thus the law in Alberta is clear: a shareholder cannot gift corporate assets through their will. Although the result in Trezzi v Trezzi was different, that case might be limited to its particular facts. Therefore it is necessary to explore other ways to deal with the succession of land or other assets held in a corporation.

1. Give shares

If all of the assets (and liabilities) of the corporation are intended to pass to the same beneficiary, the will can give away the shares held by the testator, rather than the corporate assets. Further planning will be required if the entire corporation is not intended to pass to a single beneficiary. If the testator is not the sole shareholder, the transfer of shares may be restricted by a shareholder agreement or the corporation’s articles.

2. Remove the assets from the corporation

The controlling owner of a closely-held corporation could take steps during their lifetime to transfer assets to themselves, and then leave a bequest of those assets to the intended beneficiary in their will. Steps will need to be taken to manage the tax implications of extracting assets from the corporation. Unfortunately, the removal of corporate assets is usually taxable at high dividend tax rates. Check your personal and corporate tax attributes and get professional advice before completing any such transfer.

3. Move assets to a separate corporation

Consider segregating the assets which are to pass to a particular beneficiary in a different corporation, to facilitate a gift of corporate shares in the will. Assets can often be moved from one corporation to another on a tax-deferred basis. Once the desired assets are held through a separate corporation, the individual may gift the shares of that corporation to their intended beneficiaries in the will.

4. Require the corporation to complete transactions

It’s possible to bind the corporation to carry out transactions to accomplish the testator’s intentions. However, beware of directions that won’t be legally effective, such as instructions in the will that the Executor is to cause the corporation to deal with assets in a certain way. The personal representatives of the estate will have fiduciary duties to all beneficiaries, and if they are also corporate directors, they will have a duty to act in the best interests of the corporation. The will cannot fetter the discretion of the directors. However, the desired outcome might be achieved through a unanimous shareholder agreement (USA) which dictates or restricts the actions of the directors and shareholders of the corporation, including the estate and its representatives, upon the death of the testator. For example, the USA could grant the estate, or a particular beneficiary, the option to purchase an asset, direct the payment of a dividend in-kind, or even require the directors to wind up the corporation, allowing the testator to direct the distribution of the assets received by the estate, through their will.

Where a corporation is involved, estate planning means much more than preparing a will. Begin by confirming the ownership of assets, understanding to whom they are intended to pass, and what options will – and won’t – effectively get them there.

Miller Thomson’s Private Client Services team would be pleased to help you manage the succession of corporate assets as part of a comprehensive estate plan to achieve your goals.

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This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

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