Are your shareholder agreements up-to-date? Legal and accounting fees incurred for the review and revision of shareholder agreements for the purpose of a bona fide business reorganization are now deductible to the company, and are not benefits taxable to the shareholders.
In the recent case of Truckbase Corporation et al. v. The Queen, the Tax Court of Canada ruled that, while initial shareholder agreements are a capital expense, redrafting those agreements is similar to maintaining an asset. Thus, the costs associated therewith are currently deductible expenditures for a company. The Court found in this case that the costs in question were incurred to reorganize the capital structure and update relevant shareholder agreements, and the purpose was to facilitate effective management, good governance and protection against any disruption due to the disability of key employees or shareholders. The associated professional fees were incurred to earn income and were therefore currently deductible.
The business reorganization in the Truckbase case included a typical estate freeze, involving the conversion of common shares held by an individual shareholder to preferred shares, followed by the creation of family trusts and the issuance of common shares to the family trusts. The Canada Revenue Agency reassessed the individual shareholder to include in his income certain professional fees on the basis that they had been incurred for personal estate planning purposes. However, the Court ruled that shareholder agreements played a vital role in protecting a corporation and its relationship with its shareholders. Since the expenditures were incurred for the purpose of earning income and were not personal in nature, they did not constitute shareholder benefits. The Canada Revenue Agency did not appeal the Court's decision.
For more information on this issue and how it might affect you or your company, contact your Collins Barrow advisor.
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