Adding a child on title? Think twice!

I often receive calls from potential clients who are thinking about adding a child or other loved one as a joint tenant on property or as a joint holder on a bank account.

Their thinking is: if I can save my loved ones some money on probate fees, and free up funds for immediate use after I die, where’s the harm?

Unfortunately, there are many pitfalls and the circumstances in which it may be an advisable course of action are quite limited.

1. What is the intention? Gift or trust?

In the past, adding a child as a joint tenant or joint account holder was somewhat less complicated. The law presumed that the parent intended the property go to the child upon the parent’s death.

Today, however, where a child is named on title, that presumption is reversed. The child must now prove that the parent intended that the property go to the child upon the parent’s death. In the absence of proof, the child is presumed to hold the property in trust for the parent’s estate.

In other words, if a parent wants the property to pass to his or her child, then to prevent disputes with other estate beneficiaries, the parent must declare his or her intent in another document – in a will, or declaration of gift, for example.

This extra step is often not considered. As a result, joint ownership can invite bitter disputes between heirs.

2. A “deemed disposition”

When a parent adds a child to title, CRA takes the position that the parent has disposed of half the property to the child.

This is significant because in many circumstances, capital gains tax will then apply when the property is sold. Capital gains tax is a tax on the increase in value of a capital asset from the time it was acquired to the time it was disposed of.

There are a few exemptions. The sale of a principal residence is one of them. To qualify, an owner has to “ordinarily inhabit” the residence.

Consider what will happen when a parent adds a child as a joint owner, and that child does not ordinarily inhabit the residence. Capital gains tax will apply to that child’s interest in the property – and that interest is deemed to be 50% – for any period that the child did not live at the property.

To illustrate:

Alison added her son Brad to title as joint owner when she became severely ill in 1994. Alison recovered and lived much longer than she anticipated and died in 2016. Brad moved out of Alison’s house and bought his own house in 1996.

Brad decided to sell Alison’s house shortly after her death. In preparing his tax return, he was surprised to learn that capital gains tax applied to Brad’s interest in the house (deemed to be 50%), from the time he moved out in 1996 to the time the house was sold. The property had increased substantially over that time and he had a six figure tax bill as a result.

This result could have been avoided if Alison had kept Brad off title and simply gifted the house to him in her Will. Had she done so, her executor could have claimed the principal residence exemption for the entire value of the property.

3. Claims against the child

Another good reason to think twice about adding a child as joint owner is that the child’s interest in the property could then be subject to creditor’s claims.

This means that:

  • If the child were to go bankrupt, creditors could claim an interest in the property
  • If the child is married, the child’s interest may become family property. As a result, if his or her marriage were to fall apart, the property could be subject to a claim for division of family property in the event of marital breakdown. In other words, you might have to sell the property to pay out your child’s ex-spouse.
  • If the child is sued, a judgment could be registered against the property.

4. Losing control over the asset

At some point, a parent may decide to sell a property and move elsewhere. Where a child has been added to title, the parent will lose control over when to sell or refinance. The child would need to agree.

While adding a joint owner can seem like an attractively simple way to save on probate fees and reduce the complexity of estate administration, it can often give rise to much larger problems.  You should always obtain legal advice if you are thinking of adding a child or other loved one as a joint owner.




Why you should have a will

Everyone should have a will. If you don’t have one:

  1. The distribution of your estate will be determined by the Wills, Estates and Succession Act. If you are married with children and the value of your estate exceeds $300,000, the excess value will be split among your spouse and your descendants. While a “spousal rollover” would apply to the portion to go to your spouse, you would be deemed to dispose of the balance at death, and that amount would be taxed.
  2. If you have minor children, their share of your estate is paid to the Public Guardian until they turn 19. Requests can be made for funds prior to the child turning 19 but the payment is at the discretion of the Public Guardian. The Public Guardian will deduct the cost of administering these trust funds from your children’s inheritance.
  3. Guardianship of your minor children will be determined by government authorities if your spouse did not have legal custody of the children at the time of your death or has died before you.
  4. If you do not specify when your children will receive their part of your estate, they will become entitled upon reaching the age of majority.
  5. If funds are inherited by a disabled beneficiary, the provincial government may discontinue payment of any social assistance. If the funds are instead distributed to a testamentary trust, the beneficiary should be entitled to keep receiving social assistance.
  6. Your children could be disinherited. This can especially be a concern for blended families.
  7. The administrator of your estate may not be the person who you would want to do the job.
  8. Your assets may not be given to your family members until one year following your death.
  9. No assets can be diverted to charities or friends.
  10. All assets may be converted to cash (i.e. family heirlooms may be sold and the proceeds distributed rather than passing on to your family).
  11. The administrator of your estate may be required to post a bond to protect the assets of your estate which is an added cost to the estate.

We would be pleased to help you develop your estate plan. Our rates are very competitive. Contact us for an estate planning questionnaire to get the process started.


Some of the benefits of succession planning

Succession planning involves exploring a business owner’s options for selling his or her business and putting a plan together to maximize its value upon sale and ensure the continued viability of the business into the future. It involves tax and estate planning, updating the company’s important legal arrangements, and conversations with family members and key employees as well as professional advisors.

Failure to plan could mean that you miss out on significant tax savings. If your company holds a lot of non-active assets like cash or investments in the two years leading up to a share sale, you could be disqualified from the lifetime capital gains tax exemption when you sell the company. There are a number of ways to plan to ensure that you continue to qualify for the exemption.

Planning is particularly important for a family business. For example you might have a couple of children involved in the business, but one might be better suited to running the business than the other. Planning might help you find suitable roles for each child while preventing sibling rivalry, or a way to compensate a child who may not be involved in the business. A plan can also help to ensure that your retirement savings are withdrawn gradually from the business without causing a cash crunch, while also being sheltered from a downturn in the company’s fortunes after your retirement.

If you are thinking about selling the business to key employees, planning can help to ensure that those employees have enough incentive to stick around long enough to buy it from you. You might offer these employees a small equity stake or a gradual buy-in over the short term for example. You might also want to explore ways to sell the company to your employees by way of vendor financing, to help facilitate a deal in cases where more conventional financing might be difficult for your employees to obtain.

If you miss these opportunities, you might eventually be forced to sell the company at a discount or to an inappropriate buyer. 

Agreements for start-ups

Every new company should consider whether it needs certain agreements. These include:

1. Shareholders Agreement

If you have more than one shareholder, you should have a shareholders agreement. Read more here.

2. Employment agreement

If you are hiring employees, you should have a written employment agreement with each your employees. If you don’t, you risk the following:

  • A significant severance claim. In an employment agreement, it is typical for an employer to ask an employee to agree to accept severance only as provided by the Employment Standards Act, which is one week for every year of service to the company (after year one), to a maximum of eight weeks. Without an employment agreement, the employee is entitled to demand common law severance, and the old rule of thumb for common law severance was one month for every year of service. While the equation is now more complicated than that – a court will look at length of service, age of employee, character of employment, and the job market, among other things – the benchmark for common law severance remains significantly higher than the severance entitlement under the Employment Standards Act. An employee with ten years of service could still realistically expect ten months severance under the common law.
  • Loss of intellectual property. You may think that whatever your employees invent or design or make while they work for you is automatically the property of your company. That assumption would be wrong. The law does not presume the employer’s ownership of intellectual property. To retain ownership rights over intellectual property generated by an employee, employers must have a written agreement from the employee that intellectual property developed while working at the company is the company’s property. Without such an agreement, if your company develops intellectual property, it may have difficulty selling it later or face unfair competition from a former employee.
  • Solicitation of your employees and clients by ex-employees. A non-solicitation clause in an employment agreement creates a contractual obligation of an employee not to solicit your employees or clients for a given period of time after that employee leaves the company. This can help prevent not only the loss of those clients and employees, but also prevent unfair competition by former employees.
  • Disclosure of your confidential information and trade secrets. A confidentiality clause in an employment agreement not only helps set expectations with employees, but also gives you a remedy if an employee leaks important company information.

3. Independent contractor agreement

Similar considerations apply for independent contractors, so it is important to have a written contract with your independent contractors as well. Another thing to keep in mind with contractors is, are you sure they are really contractors? It is not enough to call someone a contractor and pay them that way if the relationship is structured more as an employment relationship. For example, a person who puts in a regular shift at your office under your guidance is very likely an employee, even if you pay them as a contractor. The line between a contractor and an employee can be blurry – the important considerations are the level of control, the ownership of tools, the chance of profit for efficient work and risk of loss for inefficient work. However, every case is different and legal guidance is important. The penalties for getting it wrong can be stiff – CRA can assess for unpaid remittances (CPP, EI, income tax, etc.) while the person you thought was a contractor can sue for employment benefits (severance, vacation pay, etc.).

4. Non-disclosure agreement

If you plan on entering into major contracts or trying to attract investors, you should have a non-disclosure agreement ready to go. An “NDA” imposes confidentiality obligations on the other party, compels them to return information after the deal has been negotiated, delete all electronic data, destroy all copies, and obligate their advisors to observe the same conditions. Failure to do so results in significant liability. As a result, an NDA gives you some comfort that the other side will take precautions to protect your confidential information and use it only for the purpose of performing due diligence on your company.

Having these agreements in force creates value for your company, sets the right tone and gives you peace of mind, while preventing significant exposure and expense for your company down the road.

Five good reasons to have a shareholders agreement

Every company with more than one shareholder should have a shareholders agreement. Here are five reasons why:

1. Management – Without a shareholders agreement, minority shareholders are at the mercy of the majority. They can be shut out of important management decisions like hiring employees, signing a lease, taking out a bank loan, declaring dividends, issuing new shares, entering into supply contracts or buying another business. A shareholders agreement can guarantee shareholders a seat on the board and the right to participate in major decisions.

2. Buy outs – Sometimes partnerships don’t work out as planned. One partner can’t do what they said they could; one works 70 hour weeks while the other works 40; one is down to earth while the other has a big ego. And circumstances change: due to illness or disability, a better opportunity elsewhere, maybe a decline in motivation. Many shareholder agreements have a shotgun clause, which allows one shareholder to offer to buy out the other shareholder. A fair price is often the result, because the clause allows the person who receives the offer to either sell their shares or buy out the offering shareholder for that price. Without a shareholders agreement, a shareholder would need a court order to force a buyout.

3. Default – Shareholders occasionally do things they shouldn’t – compete with the company, share its secrets, or stop showing up for work. Or they might run into financial problems and expose their shares to seizure by creditors. Upon such an event, it would likely be in the other shareholders’ interest to buy that shareholder out. A typical default clause in a shareholders agreement allows them to do so, and with a 20-30% discount off fair market value, to act as a deterrent. Without a shareholders agreement, to try to force a sale they would have to seek a court order. A court process is expensive, time-consuming and distracting, and there would be no guarantee of obtaining a court-ordered sale.

4. Dispute – If a dispute ends up in court, it can not only cost the litigants a lot of money, but it airs a company’s dirty laundry and can cause major damage to a company’s reputation. A shareholders agreement typically requires arbitration when a dispute arises. Arbitration is held behind closed doors and the process can be streamlined to make it cost-efficient.

5. Death – If a shareholder dies without a shareholders agreement, his or her shares go to the estate. That means the other shareholders are likely to be in business with the spouse of the deceased. The spouse may not know the business, can demand that the financial statements be audited, and could be entitled to dividends. He or she would also have access to the company’s financial statements, which may increase the risk of the company’s sensitive financial information falling into the hands of a competitor. The spouse might also be tempted to try to shop the deceased’s shares around. A shareholders agreement can force the estate to sell those shares to the other shareholders. The price can be fair market value as determined by a valuator, or determined by a pre-agreed formula (by a multiple of net earnings, for example).

A well-thought out and well drafted shareholders agreement can save a company a lot of time, expense and grief. It is a key part of a company’s plan on how to deal with challenges as they arise.

Buying a business – some legal aspects

Here is a list of some issues you’ll want to consider if you are looking at buying a business:

  1. What are you buying?

Right at the start, you should ask the seller for a number of documents:

  • Customer and supplier lists
  • Financial statements
  • Equipment and machinery lists
  • Any major contracts, including the lease and any supply contracts;
  • List of employees, including job descriptions, salaries and years of service
  • Details regarding any liabilities

Before releasing this information, the seller may ask you to sign a non-disclosure agreement. The agreement should not commit you to anything other than confidentiality and the protection, use and return of information.

  1. The initial offer

It is common at an early stage for a buyer to present a letter of intent to the seller. A letter of intent sets out the basic terms of the deal, and can be either binding or non-binding. A seller may ask for a deposit upon signing.

At this point, it is advisable to ask your lawyer to search whether there are any liens on the assets of the business, any unpaid taxes, and any judgments or ongoing lawsuits.

  1. The structure of the deal

After signing the letter of intent, you will need to decide:

Who’s buying? Are you buying the business in your own name or through your company? You will want to discuss this with your accountant. Buying a business through a company has tax benefits and helps shield personal assets from creditors, but if you expect losses for a while, it may be to your advantage to run the business in your own name to write off the losses against your personal taxes.

What are you buying? The seller will likely want to sell you shares because of the lifetime capital gains tax exemption. So you might be able to negotiate a discount if you buy shares. On the other hand, if you buy assets, there is less risk of assuming liabilities. You can also pick and choose the employees and assets you want, and assign as much of the value as reasonably possible to faster depreciating assets.

  1. Paying the price

Some deals involve paying a set amount on closing. When inventory and accounts receivable are involved, these will need to be adjusted for on or after closing.

As a buyer, you may want to try to build a “holdback” into the deal (ie. pay a certain amount later) to ensure that information given by the seller is correct or that profit expectations are met. A holdback can be especially helpful if you are buying shares, in case Canada Revenue Agency conducts an audit and reassesses the company within a couple of years of the purchase.

You could also try to negotiate vendor financing and pay the vendor a percentage of the price in instalments.

  1. Employees, lease, non-compete

If the business has employees, do you want all the employees or just some? And is the seller willing to terminate the employees at closing and pay out their severance? If not, then if you take the employees on, their employment will be deemed continuous for the purposes of calculating their entitlements, including any severance you would have to pay if you later decide to let them go.

You will also want to carefully review the lease. Some landlords try to build a lot of extras into the operating costs, such as rent on vacant space and high management fees. Other landlords try to impose the cost of capital improvements (roof and structural repairs) on tenants. You will probably want to ensure that there is no demolition clause in the lease and that you have adequate assurances about parking. Ideally, you will want to avoid a personal guarantee. A lawyer can help negotiate these and other improvements to a lease.

To prevent the seller from starting a competing business, you should also insist on a non-compete agreement.

  1. The Agreement

Once the basic terms have been agreed to, the buyer’s lawyer drafts the purchase and sale agreement, which describes the assets, provides a mechanism to value the inventory and accounts receivable, and makes the seller liable for the information given to you about the business. If the seller is a corporation, you should ask for a personal guarantee.

Ten pitfalls in a commercial lease

A commercial lease can be full of pitfalls for a tenant. Here are ten to consider:

1. Damage – The damage clause will often give only the landlord the right to terminate the lease if the premises are damaged. However, in that event both landlord and tenant should be able to terminate. Otherwise, the tenant may be unable to use the premises for a lengthy period of time and unable to walk away from the lease.

2. Assignment – Some leases allow the landlord to terminate the lease when the tenant requests consent to assign the lease to a buyer. Such a clause can devalue a business that a tenant wants to sell.

3. Repairs – Some landlords try to make a tenant liable to repair all aspects of a building – including its structure. It may be appropriate for a tenant to limit its repair and maintenance obligations to interior surfaces, and possibly to plumbing, HVAC and electrical. Wear and tear and items covered by the landlord’s insurance should be excluded.

4. Operating expenses – Sometimes, the operating expenses are straightforward – taxes, insurance and maintenance costs, ie. a “triple net” lease. In other leases, a landlord might try to impose all kinds of costs and fees on tenants: structural repairs to the building, management salaries, the depreciation of machinery and equipment, a percentage of the operating expenses of a vacant lot, the landlord’s legal and accounting fees, a management fee; the list goes on. Depending on the landlord, the building and the market, some of these items may be negotiable.

5. Arbitration – The arbitration clause will often provide that if you cannot agree on the rent for the renewal or extension term, rent will be determined by three arbitrators. Three arbitrators cost a lot more than one, so the threat of arbitration by three arbitrators might be enough to make a tenant accept a higher rent than they might otherwise be comfortable accepting. For smaller premises, one arbitrator is likely enough.

6. Relocation – A relocation clause allows the landlord to relocate the tenant to other premises within the building. This clause should either be deleted or the tenant should ensure that it can only be relocated to a comparable location and that the landlord has to pay for all expenses related to the relocation, including the cost of moving the business and installing tenant improvements.

7. Removing leasehold improvements – Sometimes a landlord will try to make you responsible to remove the leasehold improvements at the termination of the lease. Doing so could result in significant expense and distraction at a time when you are setting up business elsewhere and wishing to focus your attention and resources there. You may want to try to negotiate to a clause that would obligate you to remove fixtures only and to leave the suite in a clean condition.

8. Insurance – A landlord will generally ask a tenant to waive subrogation. The landlord should do so as well, otherwise the landlord’s insurance company could pursue you for a claim covered by the landlord’s insurance company. Also, if the landlord asks you for an indemnity, you should ask for a statement in your indemnity clause that your indemnity will not relieve the landlord’s obligation to insure the property. Another thing to consider is that a tenant’s commercial general liability policy should have a cross-liability endorsement. Otherwise you could be in a situation where you want to sue your landlord but cannot do so because your policy forbids it.

9. Non-disturbance – Many leases have an attornment clause, which grant subsequent mortgage lenders priority over the lease. If a lease has such a clause, and the landlord defaults on its mortgage and the bank forecloses, the bank may not be obligated to recognize the tenancy. It may be possible to modify this clause to obligate the landlord to obtain a non-disturbance agreement, which would obligate the bank to recognize the tenancy in the event of foreclosure.

10. Tenant Remedies – If there is a problem, the tenant should be able to repair the premises if the landlord fails to within a reasonable time, and deduct the cost from rent.

These are only some of the pitfalls that might be found in a commercial lease. We can assist you by reviewing your lease to identify issues and can also help you to negotiate revisions.

Franchise agreements: ten things for a buyer to consider

If you are thinking about buying a franchise, here are some things you should know about franchise agreements:

1. Most of a franchise agreement is likely non-negotiable

Generally speaking, franchisors have confidence in their brand and their system and want to keep contract administration and legal expense to a minimum. As a result, a franchise agreement is usually non-negotiable on substantive issues. A franchisor’s willingness to negotiate could actually be a warning sign that it lacks confidence in its system.

2. Exclusive territory

A franchise agreement should generally grant an exclusive territory. Depending on the nature of the business, this could be anywhere from a few blocks to a few kilometeres.

3. Supplies

A franchisor will likely require you to purchase supplies through their approved suppliers. This means that there will be uniform quality standards and that customers can expect a similar experience at any given franchise. However, you should expect that franchisors will receive rebates or other benefits from its suppliers and that you will not be able to share in those benefits.

4. Remodeling and renovations

A franchisor typically has discretion to require you to remodel and renovate when it chooses. This means there is some assurance that other locations will have to freshen up from time to time. However, the expense can be significant and the timing can be inconvenient: it is not unheard of for a franchisor to require a franchisee to remodel just prior to selling a franchise, for example.

5. The entire agreement clause

A franchise agreement will likely have an entire agreement clause. This means that whatever you’ve been told about the franchise, no matter who told you, has no legal effect unless it is written into the franchise agreement. So if you have been promised something that is not reflected in the agreement, you should ensure that it is written into the agreement.

6. Applicable law

Under a franchise agreement, the laws of the franchisor’s home jurisdiction will typically govern. This presents two disadvantages to a franchisee. One is that in the event of a dispute, you may need to retain counsel in a faraway jurisdiction to bring your claim. The other is that a franchisor may choose to locate in a jurisdiction with laws more favourable to a franchisor than a franchisee.

7. Arbitration

Franchise agreements generally provide for arbitration as a dispute resolution mechanism. This means that you would have no right to take your franchisor to court in the event of a dispute. This could put you at a disadvantage for several reasons:

  • Arbitration can be more expensive than going to court. Judges are paid by taxpayers, while arbitrators are paid by the parties – at a rate of hundreds of dollars per hour.
  • The discovery process for an arbitration can be quite limited. This means that documents in the possession of the franchisor that could help build your case may to be inaccessible to you in an arbitration.
  • Sometimes the threat of negative publicity from a lawsuit can be enough to force a settlement. However, arbitration is held behind closed doors and the outcome is confidential, so threatening arbitration is less likely to force the other party to settle.

8. Assignment / selling your franchise

The assignment clause can make a franchise difficult to sell. It usually allows the franchisor to withhold consent to a transfer unless certain requirements are met. Fees also may be payable, and they can be considerable – $10,000 or $15,000 for example. In some cases, the franchisor may even have a right of first refusal to buy back the franchise and deduct the value of the goodwill in doing so!

9. Non-competition

The non-compete clause means that you cannot learn the ropes at your franchise, sell the business and go off and start a competing business in the same industry. Generally speaking, a non-compete clause will keep you out of the industry for a period of several years after selling your franchise.

10. Withholding tax

If your franchisor is based outside Canada, then any royalties you pay to that franchisor will be subject to a withholding tax of 15%. If  your franchisor is US based, then it should be able to claim a tax credit for this tax, so your agreement should state that you can deduct withholding tax from royalties.

If you would like assistance in reviewing a franchise agreement, we would be pleased to help.