How does a buy-sell agreement work in a family business?

A family buy-sell agreement has the same parts as any other: the events that start a sale, a price method, a buyer and a closing process. What changes is the people (see also selling to a family member). Siblings or cousins may work in the business while others only hold shares, and every owner is also a relative. That makes it more important to agree the rules while relations are good.

Who has to sign

Under CBCA s.146, an otherwise lawful written agreement among all the shareholders that restricts, in whole or in part, the directors’ powers to manage the business is valid. A purchaser or transferee of shares subject to it is deemed to be a party. Ask a lawyer how that applies to a child who inherits shares, and make sure the document is signed by every holder and is given to each new one. Provincial statutes cover provincially incorporated corporations.

When relatives are not at arm’s length

Under Income Tax Act s.251, related persons, such as a parent and child or a brother and sister, are deemed not to deal at arm’s length; for persons who are not related, such as cousins, it is a question of fact. Section 69 deems fair market value to apply where property moves between non-arm’s length persons for more or less than that value, except as the Act expressly provides otherwise. Section 84.1 can deem a dividend or reduce paid-up capital where an individual resident in Canada sells shares held as capital property to a corporation with which they do not deal at arm’s length and that is connected with the corporation whose shares are sold immediately after. It has exceptions for intergenerational business transfers, with conditions including a child aged 18 or older controlling the buyer and a joint election. Ask an accountant before choosing the structure.

Buying out a sibling

If the company buys the shares, CBCA s.34(2) bars the payment where there are reasonable grounds for believing the corporation is, or would after the payment be, unable to pay its liabilities as they become due, or would fail the asset test in that subsection, subject to the exceptions in ss.35–36. Section 84(3) of the Income Tax Act deems a dividend equal to the amount paid above paid-up capital, if any.

Keeping the family part fair

• Say how the working relatives are paid, so that pay is not mixed up with the price of shares.
• Decide whether shares must be offered to relatives before an outsider.
• Name an independent person to set the price if the family cannot agree.
• Review the agreement when roles or family circumstances change.