Posts Tagged ‘death of a small business owner’

This seems like a very strange post on a small business site.  It isn’t! ‘Death’ is an unplanned exit strategy for a small business owner – gruesome as it might sound. The death of a proprietor or shareholder should be part of contingency planning.

The death of a proprietor signals the legal cessation of the proprietorship. The T2125 form has an end date on the date of death of the proprietor. The assets and liabilities are those of the deceased taxpayer anyway so disposing of those can be performed as part of the winding up of the estate of the deceased proprietor.

The death of a small business shareholder presents a few unique problems. The common shares of the deceased shareholder need to have a valuation placed on them. Any shareholder loans payable to the shareholder now are payable to “The estate of the (deceased) shareholder.” The corporation is a separate legal entity and can survive the death of a shareholder – but may not.  Is a succession plan in place? If 100% of a shareholder’s livelihood derives from a salary and the shareholder dies, there is no carry-on of a shareholder to an estate.

It could take 1-2 years to successfully windup a small business corporation and legally surrender the articles of incorporation. The assets must be disposed or and used to pay liabilities. If there is any cash left, the estate could declare and pay a liquidating dividend to the estate of the deceased shareholder. In reality, the cash collected from outstanding trade receivables might be insufficient to cover current liabilities, including CRA remittances. In that case, the estate representative (executor) might have to inject more money into the business to pay all bills.

I have seen many small businesses wind-up with large amounts owed to shareholders – in the form of a shareholder loan and issued common stock. There is some tax relief available in the form of an Allowable Business Investment Loss (ABIL).  This is a “too late” strategy for the estate.

It is imperative that the shareholder(s) of a small business have a succession plan in place. An executor should be appointed who understands business in general and who may be responsible for winding up the business.