{"id":54176,"date":"2026-08-20T13:33:47","date_gmt":"2026-08-20T17:33:47","guid":{"rendered":"https:\/\/www.millerthomson.com\/?p=54176"},"modified":"2026-08-20T13:33:49","modified_gmt":"2026-08-20T17:33:49","slug":"unanimous-shareholder-agreements-three-tax-pitfalls-business-owners-must-avoid","status":"publish","type":"post","link":"https:\/\/www.millerthomson.com\/en\/insights\/corporate-tax\/unanimous-shareholder-agreements-three-tax-pitfalls-business-owners-must-avoid\/","title":{"rendered":"Unanimous shareholder agreements: Three tax pitfalls business owners must avoid"},"content":{"rendered":"\n

Whether you are starting a new business or considering adding shareholders to your existing business, a unanimous shareholder agreement can be one of the most powerful tools available to business owners, and one of the most expensive to get wrong. The tax implications of certain USA provisions are frequently overlooked at the drafting stage, yet they can trigger unintended changes in corporate control, loss of CCPC status, and deemed year-ends with significant tax consequences. A key consideration should be whether a unanimous shareholder agreement (\u201cUSA<\/strong>\u201d) makes sense for you and, if so, what provisions it should contain.<\/p>\n\n\n\n

This article identifies three pitfalls business owners and their advisors should understand before finalizing a USA.<\/p>\n\n\n\n

What is a USA and why does it matter?<\/h2>\n\n\n\n

A USA can include a great variety of rules for modifying the rights of shareholders and directors, as well as providing governance, dispute resolution, and succession planning mechanisms for the corporation. There are few restrictions on what can be included in a USA, although the rules for USAs vary by jurisdiction.<\/p>\n\n\n\n

While many business owners and professionals are aware of the wide flexibility and utility of USAs, they are not always aware of the extent of the implications of including certain provisions.<\/p>\n\n\n\n

It is now well established in Canada that a USA is considered a constating document of a corporation, meaning it is more than a contract, it is a document under statute which provides protected rights to its parties, like the articles or bylaws of the corporation. As a constating document, its provisions must be considered in assessing corporate control when determining the application of certain provisions under the Income Tax Act<\/em> (Canada) (the \u201cITA<\/strong>\u201d).<\/p>\n\n\n\n

How is \u201ccontrol\u201d determined for tax purposes?<\/h2>\n\n\n\n

Establishing who controls a corporation pursuant to the ITA is important for a number of reasons, including determining the corporation\u2019s status as a private corporation, Canadian controlled private corporation, or small business corporation, each of which comes with its own rules and advantages under the ITA. An inadvertent loss or change of status could be detrimental to a corporation, affecting access to the small business deduction, the lifetime capital gains exemption, and other valuable tax attributes.<\/p>\n\n\n\n

The ITA uses the term \u201ccontrol\u201d in two ways: De Jure <\/em>control and De Facto <\/em>control. De Jure <\/em>control is known as legal control, which is generally considered to be \u201ceffective control of the affairs and fortunes of the company\u201d or ownership of enough shares of the corporation to have a majority vote in the election of its board of directors<\/a>.[1]<\/a> De Facto<\/em> control is an extended meaning of control described in the ITA as \u201ccontrol, directly or indirectly in any manner whatever.\u201d While any contract may be considered when determining De Facto <\/em>control, a USA will also be included in the test for De Jure <\/em>control.<\/p>\n\n\n\n

What is the first common pitfall? Shifting board power<\/h2>\n\n\n\n

Provisions in a USA that restrict the power of directors and divert power to a key person or allow a key person to appoint the board of directors regardless of their share ownership can create unintended tax consequences.<\/p>\n\n\n\n

Risk:<\/strong> An individual given corporate power under a USA may be considered to control the corporation for tax purposes, even without majority share ownership.<\/p>\n\n\n\n

What is the second pitfall? Share option provisions<\/h2>\n\n\n\n

Share option provisions in the USA can also create unintended tax consequences. When determining control, the ITA provides that where a person has a right to acquire shares under contract or otherwise whether absolutely or contingently, then that option is considered exercised, subject to certain exceptions.[2]<\/a> The ITA exceptions to such contingency provisions are death, bankruptcy, or permanent disability of the shareholder, and it is a stated position of the CRA that they will not consider a \u201cright of first refusal\u201d or \u201cshotgun\u201d clause as a contingent right for control purposes either.[3]<\/a>  <\/p>\n\n\n\n

Risk:<\/strong> A shareholder, or potential shareholder, may be considered to have control of the corporation earlier than anticipated. This is an especially important consideration for when a Canadian Controlled Private Corporation (\u201cCCPC<\/strong>\u201d) is looking to attract foreign investors, such as private equity funds, that want to hold a minority interest with a number of additional rights under the USA. These additional rights could cause an inadvertent loss of CCPC status and all of the benefits that come with it.<\/p>\n\n\n\n

What is the third pitfall? Unplanned acquisition of control and loss restriction events<\/h2>\n\n\n\n

A third trap that stems from the first two is that there are tax implications for when control changes, such as the acquisition of control (\u201cAOC<\/strong>\u201d) rules and the loss restriction event (\u201cLRE<\/strong>\u201d) rules. Among other things, an AOC will trigger a deemed year end for the corporation on the date that it occurs, which may have a number of unintended consequences if not properly planned for. If a corporation has losses and undergoes an AOC, then the LRE rules may serve to prevent the future utilization of those losses. A comprehensive discussion of the AOC and LRE rules is beyond the scope of this article.<\/p>\n\n\n\n

Risk:<\/strong> Unplanned tax liabilities or loss of valuable tax attributes. Because the AOC and LRE rules can be triggered by USA provisions, rather than by an actual share transaction, business owners and their advisors may not recognize the triggering event until after the consequences have already materialized.<\/p>\n\n\n\n

Key takeaways<\/h2>\n\n\n\n

The control, AOC, and LRE rules are extensive and complex, and require that a USA must be carefully drafted in order to properly navigate them. \u201cCarefully drafted\u201d in this context means more than clear language, it means that every governance provision must be assessed for its tax implications before it is included.<\/p>\n\n\n\n

Before finalizing a USA, business owners and their advisors should consider:<\/p>\n\n\n\n