A recent Ontario Court of Appeal decision dismissed a family’s contention that the deceased, in his will, could not gift corporate assets held by a company of which he was a sole shareholder.
The deceased and his wife were married for 25 years. They had two daughters together.
The deceased also had a son from a previous marriage, who was 13 years old when the couple married.
The deceased died on January 8, 2016.
Prior to his death, the deceased operated a successful construction business through two Ontario corporations.
In his will, the wife and the deceased’s son were named as joint executors and trustees of his will. Additionally, the son was gifted all of the deceased’s interest in the first corporation, real property (which was owned by the second corporation) and all the equipment and chattels owned by the second corporation.
Finally, his wife and three children were each gifted equal shares of all other real property owned by the deceased, all other assets owned by the second corporation and the residue of the deceased’s estate.
On one side of the dispute was the deceased’s son; on the other side were his wife and two daughters.
Lower Court Judgment
The wife and two daughters had challenged the deceased’s bequests of assets held by the second corporation to the son on the basis that the deceased did not own those assets, as they were owned by the second corporation, and therefore the deceased could not give what he did not own. The application judge concluded that the deceased could bequeath such assets.
The wife and daughters appealed this finding.
Court of Appeal Decision
The main issue was whether the application judge erred in concluding that the deceased could effectively bequeath assets held by his second construction company, of which the deceased was the sole shareholder, to his son.
His wife and two daughters argued that those gifts were invalid because a shareholder of a corporation owns only the shares of that corporation (which the shareholder can bequeath), but does not own the corporation’s assets (which the shareholder cannot bequeath). They claimed that upholding those gifts would involve disregarding the separate corporate personality of the second corporation; thus because these gifts were invalid, they fell into the residue of the estate.
First, the Court of Appeal found that the application judge correctly decided that the deceased’s intention was to wind up the second corporation and have that money distributed to the son.
Additionally, the court concluded that, under s. 193 of the Ontario Business Corporations Act, the deceased, as a sole shareholder of the second corporation, had the power to wind up the corporation and to order the distribution of corporate assets, stating:
“With respect to the executors’ general powers under corporate law, s. 193(1) of the Business Corporations Act, provides that “[t]he shareholders of a corporation may, by special resolution, require the corporation to be wound up voluntarily”. Section 67(2)(a) of the Business Corporations Act provides that an executor or estate trustee of the estate of a deceased security holder may exercise all the rights that the deceased security holder had before their death. Thus, while he was alive [the deceased] had the corporate authority, as the sole shareholder of [the second corporation], to wind-up the corporation. Upon his death, that authority devolved to his executors or estate trustees. As a result, under Ontario corporate law [the deceased]’s executors have the power to implement his intention to wind-up [the second corporation].”
Additionally, the deceased’s will provided the executors with the necessary powers to implement his wish to have the second corporation wound up. Therefore, in addition to the executors’ power to wind up the corporation under corporate law, the court found that the executors implicitly had the authority in their discretionary power to convert the estate’s assets into money. As such, the court agreed with the application judge that the deceased’s will conferred on his executors the authority to wind up the second corporation.
The court concluded:
“Because of these two independent sources of authority for [the deceased]’s executors to wind-up [the second corporation], I would reject [the wife]’s contentions that the gifts of the assets […] fail because [the deceased] did not directly own those assets and that upholding these gifts would disregard [the second corporation]’s separate corporate personality. […]. In substance, [the deceased]’s shares […] became part of the estate, and [the deceased] effectively directed his executors to wind-up the company and to distribute its assets in accordance with his will, even though he did not own those assets directly.”
As a result, the court concluded that the application judge did not err in concluding that the deceased could effectively gift corporate assets held by his construction company.
The court rejected the appeal on this issue.
The highly-experienced and strategic Calgary estate lawyers at DBH Law can help you draft or update your will to reflect the needs of your family and your estate, no matter its size or complexity. Our responsive and concise approach to our work makes the process of will and estate planning easy for our clients.
We take pride in the relationships we have built with our clients, and the opportunities we have to represent their legal needs as they grow and evolve. We understand your need to provide for your family and loved ones while also minimizing the taxation and chances of litigation your estate may face. We can be reached by phone at 403.252.9937 or online and look forward to the chance to learn about what is important to you, and how we can help you achieve that.