Can I buy out my partner gradually instead of all at once?

Yes. A buyout does not have to close in one step. The agreement can set a first purchase now and further purchases on later dates (see how to buy out a business partner), with the price for each stage fixed or tied to a method you both accept. The corporate statute, the tax rules and the wording of your agreement decide whether a staged plan works. A partnership that is not a corporation follows its province’s partnership law, so this page focuses on shares.

Two ways to stage it

You can buy blocks of your partner’s shares personally, or the corporation can buy its own shares back in stages. The Canada Business Corporations Act (CBCA) says that, subject to the solvency limit in s.34(2) and to its articles, a corporation may purchase or otherwise acquire shares it has issued. That Act governs federally incorporated corporations. A provincially incorporated corporation follows its own province’s statute, so confirm which one applies to yours.

The solvency limit on each buyback

Under CBCA s.34(2), a corporation shall not pay to acquire its shares if there are reasonable grounds for believing it is, or would after the payment be, unable to pay its liabilities as they become due. It also cannot pay if the realizable value of its assets would after the payment be less than the total of its liabilities and the stated capital of all classes. Sections 35 and 36 set out exceptions with their own tests, including for redeemable shares. The test applies to each payment, so a plan that works for the first stage may need a second look at the third.

Tax on each stage

When a corporation resident in Canada redeems, acquires or cancels its own shares, Income Tax Act s.84(3) deems a dividend to be paid equal to the amount, if any, by which the amount paid exceeds the paid-up capital of those shares. A sale of shares to you personally is a different transaction. The Canada Revenue Agency (CRA) explains that a seller who receives the proceeds over a number of years may be able to claim a capital gains reserve, reporting part of the gain in a later year by reference to proceeds not yet received. It says that generally most reserves can run up to four years, subject to exceptions. Ask both advisors which treatment fits each stage.

What to settle in the agreement

• Fix the date, share count and price method for every stage, and say what happens if a stage is missed.
• Say who votes the unsold shares and who sits on the board between stages.
• Ask whether the seller will want security for the unpaid balance.
• Decide whether the seller must stay or may leave before the last stage.