The Executor's
Problem

A note on who this is for

This guide is written for one reader: the person named as executor (estate trustee, in Ontario's language) of an estate that includes an operating business.

If that is you, you have probably found the general guidance already. Much of it is written by law firms, and much of it is good. It explains probate, your duties, the tax filings and the personal liability the role can carry. Read it. This guide does not repeat it.

What that material covers less often is the reason you are here. The estate holds more than a house, bank accounts and a portfolio. There is a company in it. You may work in that company, or you may never have set foot in it. Either way, its shares are now part of what you administer, and a business behaves differently from the other assets in an estate.

A bank account can wait while the estate is organized. A business keeps operating. It has employees to pay, customers and suppliers watching, and often a lender with terms of its own. Its value can change while questions of authority are being settled. The tax arising on death can be significant, and the cash to pay it may sit inside the company whose shares are being taxed.

This guide is a map of that ground. It is general education, written for Ontario estates. It will not make you an expert, and it is not legal, tax, accounting or valuation advice. Administering an estate that holds a business is work for a team of professionals, and part of your role is knowing whom to call, and when. The aim here is narrower: that you finish with a clear view of the problem, the questions to ask, and the order to ask them in.

Why a business changes the work

An estate made up of a house, registered accounts and a portfolio carries emotional weight, but its administration tends to follow an orderly path. A business adds three complications.

I  It keeps operating. Most assets can sit while the estate is organized. A company cannot. Payroll, suppliers, customers and lenders continue on their own schedule, and key employees may be weighing their options. Part of the value you are responsible for depends on continuity in the weeks after a death.

II  It is hard to value. A bank balance is a number. The value of a private business is an estimate, built on earnings, assets, goodwill and judgment. That estimate can affect the tax reported on the final return, the price under a shareholders' agreement and what each beneficiary receives. Reasonable people, family members included, can disagree about it.

III  The tax may arrive before the cash. An estate can owe significant tax because the shares are valuable, while the cash that could pay it sits inside the company or does not exist in liquid form. Where that happens, the estate needs a source of funds that does not harm the business.

Keep these three in view: continuity, valuation and liquidity. Most of what follows traces back to one of them.

The business keeps its own clock

The legal process and the business move at different speeds, and the first task is to understand who can act in each.

If there is a will, your authority as estate trustee generally comes from the will itself. A certificate of appointment, commonly called probate, is the court's confirmation of that authority. Probate is not required for every estate or every asset, but financial institutions and others often ask for it before they will deal with you. If there is no will, authority generally comes from the court's appointment. Your estate lawyer can tell you what you may do now and what should wait.

Authority over the estate is separate from authority over the company. The deceased's shares are an asset of the estate. The company's bank accounts and property belong to the company, which is a separate legal person. A corporation is managed by its directors and officers, and its signing authorities are set by its own records and its banking arrangements. Being named executor does not, on its own, make you a director, an officer or a signatory.

What follows depends on the facts. If other directors or officers remain, the company may carry on with its signing authority intact. If the deceased was the only director, a new director usually has to be elected by the shareholders, who now include the estate, before anyone can act for the company. The articles, the by-laws and any shareholders' agreement govern how that is done, and the bank will have requirements of its own.

Other matters may need early attention. A loan or a lease may contain terms that apply on an owner's death. A key customer or employee may want to hear from someone with authority. Confirm these points early.

The liquidity question

If you read one section closely, make it this one.

When a person dies, the Income Tax Act generally treats them as having disposed of their capital property immediately before death, at fair market value. This is called a deemed disposition. Shares of a private company are generally capital property, so the growth in their value over the owner's lifetime can produce a capital gain on the final return, although nothing has been sold.

The result is not the same for every estate. Property that passes to a spouse or common-law partner, or to a qualifying spousal trust, can generally transfer at its tax cost. That defers the gain until the survivor disposes of the property or dies. Conditions apply, including Canadian residency and time limits for the property to vest. Exemptions, losses and elections can also change the figure. The accountant determines what applies.

Where tax is payable, it is due in cash by a fixed date. The balance on the final return is generally due on April 30 of the year after death, or six months after the date of death where the death occurs in November or December. Shares of a private company usually cannot be sold quickly, or in part, on the estate's schedule. An estate can therefore hold substantial value and little cash when the tax falls due.

So an early question is where the cash will come from. The possibilities include liquid assets outside the business, funds the company can properly distribute, life insurance where it was arranged (see the next section), borrowing, and an election to pay the tax arising from the deemed disposition in up to ten annual instalments, with interest and with security acceptable to the Canada Revenue Agency (CRA). Each has costs and conditions. Where none is available, the estate may have to consider selling assets, and early advice can widen the choices.

Is there a policy, and how does it work?

Life insurance connected to the owner or the business may have been arranged to provide cash at this point. Insurance is one way to fund the need. Whether it suits a given case depends on the need, the structure, the cost and the alternatives. For an executor, that decision is in the past. The task is to read what exists.

Three roles. The policy owner holds the contract and its rights. The life insured is the person whose death triggers the benefit. The beneficiary is the person or entity designated to receive it. These can be three different parties.

Where the money goes. The death benefit is paid to the designated beneficiary under the terms of the policy. Ownership alone does not decide it. A corporation that owns a policy is often its beneficiary as well, but confirm the designation with the insurer. Proceeds paid to a named individual generally go to that person directly and do not form part of the estate. That may be what was intended. It also means the estate cannot count on those funds for tax or other obligations.

The capital dividend account. Where a private corporation receives a death benefit as beneficiary, the proceeds less the policy's adjusted cost basis are generally added to its capital dividend account (CDA), subject to the detailed rules and adjustments in the Income Tax Act. Three steps are distinct: the corporation receives the proceeds, its CDA balance is calculated, and a capital dividend is paid. A capital dividend requires a directors' resolution and an election filed with the CRA on time, and it cannot exceed the CDA balance without tax consequences. The full death benefit is not automatically available to shareholders tax-free. The accountant must verify the calculation and the election requirements before any dividend is declared.

Is it tied to an agreement? If there are other owners, the policy may exist to fund a purchase of the deceased's shares under a shareholders' or buy-sell agreement. Two payments are then involved, and they go to different parties. The insurer pays the proceeds to the policy's beneficiary, which is often the company or the surviving owners. The estate is paid separately, as the price for the shares, when they are purchased or redeemed. Check whether the policy proceeds are subject to funding obligations under the agreement. Do not assume they are available for other estate needs.

Whose company is it now?

If the deceased was the only shareholder, the shares pass through the estate under the will. Until they are distributed or sold, the estate trustee can generally exercise the rights attached to them, including the vote that elects directors, once the company has the evidence of authority it requires. Managing the company remains the work of its directors and officers, as Section One describes.

If there were other owners, the question is what happens to the deceased's shares. The answer may already be written. A shareholders' agreement, or a separate buy-sell agreement, often addresses an owner's death. It may require or permit the surviving owners or the company to buy the shares, at a price or by a method it sets out, with funding it describes. Where such an agreement exists, is current and is funded, many of the difficult decisions have already been made.

Where there is no agreement, or it is out of date or unfunded, the estate may hold shares in a private company alongside co-owners, with no agreed price, no committed buyer and no ready funding. That can take time to resolve, and it usually calls for negotiation with advice on both sides.

Where a purchase does take place, its structure has tax consequences. The survivors may buy personally, the corporation may redeem the shares, or the two may be combined. Each produces a different result for the estate and for the survivors. These are decisions to make with the lawyer and the accountant.

Valuing a thing that resists valuation

Several of your tasks depend on what the business is worth: reporting the deemed disposition, carrying out a buy-sell, dividing the estate, and accounting to the beneficiaries or the court.

A private business has no quoted price. Its value is an estimate built from earnings, assets, goodwill and assumptions about the future. Two qualified valuators can reach different figures in good faith.

There may also be more than one number. For tax, the question is generally fair market value immediately before death. A shareholders' agreement may set its own price, formula or valuation date, and its definition of value may differ from the tax definition. Dividing the estate among beneficiaries may call for a value at another date. One report does not necessarily serve every purpose. The date, the purpose and the terms of any agreement determine what is needed.

The figures you rely on should be supportable. The CRA can review a value reported on the final return, and beneficiaries can question a value used in the distribution.

Fairness when one heir ran the business

Some of the hardest questions in these estates are family questions. They are not legal or financial.

A common situation: one child works in the business and is meant to inherit it. The others do not. The business is most of the estate. Equal and fair may then be different things.

Dividing the shares among all the children can leave the one who runs the company in partnership with siblings who are not involved in it. Leaving the business to the active child can leave the others with much less. Either result can strain a family. As executor you carry out the will, and you may be doing so while people who are grieving question its fairness.

Where the owner planned for this, the usual approach is equalization. Other assets, sometimes including life insurance proceeds, are directed to the children who do not receive the business, so that each receives what the owner considered fair. Where that was done, your task is to administer it. Where it was not, you carry out the will as written, with the estate lawyer's guidance. Clear communication and careful records help.

Questions worth asking early

These are the questions to raise early with the estate lawyer and the accountant, in the order the sections appeared.

The team, and the order to call them

This guide keeps returning to the lawyer, the accountant and the valuator. In an estate that holds a business, bringing the right professionals together is a central part of the executor's role. The technical advice is theirs. The decisions you make as estate trustee, and the coordination, are yours.

A word for the owner who is still here

Much of what this guide describes depends on what the owner arranged in advance. Where insurance was structured with the tax in mind, the shareholders' agreement was current and funded, equalization was addressed and a valuation method was agreed, the executor is more likely to be administering a plan than building one. Where none of that was done, the executor has fewer options and less time, and the family carries more uncertainty.

That brings me to a second reader: the owner who is still building the business and has recognized their own executor in these pages.

If that is you, the point is short. Planning cannot guarantee a result. It can leave your executor better prepared and with more options. Most of it is easier to do while you are well and in control of the timing. Arrangements such as an estate freeze, a funded shareholders' agreement or an insurance policy depend on the facts when they are put in place, including the value of the business and your health, and their results depend on your circumstances and on the law when they take effect.

That is the work I do with owners: reviewing the insurance and funding side of the plan, and helping coordinate with the lawyer, the accountant and the valuator who advise on the rest. The next page lists what your executor should be able to find. If this guide raised a question about your own business that you cannot answer, I would be glad to talk it through.

What your executor should be able to find

An executor's first weeks tend to go better when the essentials are easy to locate. An owner can prepare this record while the business is running. An executor can use the same list to see what is missing.

Who you'd be working with

I'm Zachary Sikorski, Principal of Sheldrake Group, an independent insurance and business planning practice serving business owners and their families in Ontario.

Before founding Sheldrake Group, I spent my career in financial services, beginning in 2008 and most recently serving as a District Vice President at Sun Life, supporting independent advisory practices across Ontario and British Columbia. It was an unusual vantage point. Rather than building a single book of clients, I watched hundreds of planning conversations unfold, involving business owners, professionals, and families, close enough each time to see how hard it can be to connect otherwise sound investment, insurance, tax, and estate advice into one coordinated picture.

Sheldrake's role is specific. I am a licensed life insurance agent and hold the CHS, EPC and CEA designations. I help owners and executors understand the insurance and funding questions in a plan, and I work alongside their other advisors. Sheldrake Group does not provide legal, tax, accounting or business valuation services, and this guide does not give investment advice.

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