What happens if my business partner dies and there is no buy-sell agreement?

Without a buy-sell agreement, nothing in your paperwork says what happens to a dead partner’s share, so the default rules decide, and none of the federal rules described below gives the survivor a right to buy. The share becomes part of the estate, and a legal representative takes charge of it.

If the business is a corporation

Under the Canada Business Corporations Act, a corporation whose articles restrict share transfers must treat the personal representative of a deceased shareholder’s estate, once it furnishes the evidence the Act requires, as a registered holder able to exercise the shareholder’s rights, and any other corporation may. The estate’s representative can then exercise the shareholder’s rights, including voting. Provincially incorporated companies follow their own statutes, which may differ.

If the business is a partnership

The Canada Revenue Agency says a change of partners affects the business differently depending on the partnership agreement, and in some cases the business is treated as a new legal entity needing a new business number and new program accounts. With nothing in writing about a partner’s death, the survivor may have little to rely on beyond provincial law, which is a question for a lawyer.

The tax bill comes first

On death, the Income Tax Act deems the person to have sold each capital property immediately before death for its fair market value, which can include shares in the business. Rollover rules, such as one for a surviving spouse, can change the timing, but the interest still has to be valued. The CRA says the legal representative must make sure returns for the year of death are filed and balances owing are paid before the estate is distributed. The estate may therefore need cash, or a buyer, before anyone has agreed what the interest is worth.

What the missing agreement would have settled

These federal rules say who can exercise a deceased shareholder’s rights and what tax follows. They do not say who may buy the interest, at what price or on what terms. Only a signed agreement does that, so the survivor and the estate must negotiate from scratch. If the problem is a partner who wants out while alive, see what if my partner wants out and I do not.