Introduction
Family businesses pass to the next generation in many forms. When the transition goes smoothly — one heir takes over, the others are compensated — the tax and legal issues are manageable. When the transition produces co-ownership between siblings who have different visions for the business, the complexity multiplies.
Scenario: Marco and Sofia Inherit Their Father's Construction Corporation
Their father, Aldo, built a successful general contracting business over thirty years. When he dies at 74, his will leaves the shares of the corporation — valued at approximately $2.4 million — equally to his two adult children: Marco, 47, who has worked in the business for fifteen years, and Sofia, 44, who has a professional career elsewhere and has never been involved in operations.
Under the spousal rollover, Aldo's shares passed to his wife at ACB years earlier. When she subsequently died, there was no spousal rollover — the shares were deemed disposed at FMV ($2.4 million), generating a significant capital gain in her estate. After that tax was paid, the shares passed to Marco and Sofia at their stepped-up ACB (the $2.4 million valuation at the mother's death).
Marco and Sofia now each own 50% of a corporation they approach very differently.
The Governance Problem
Marco wants to grow the company, reinvest profits, and eventually buy out Sofia. Sofia wants to receive annual dividends and eventually sell — ideally within five years.
There is no shareholders agreement. The corporation has no mechanism for resolving the difference in goals. This is the co-founder deadlock scenario from Article 105 in a family business context — with the additional complexity of family relationships and a business that has been operating continuously for thirty years.
The Tax Position of Each Sibling
Marco and Sofia each have an ACB in their shares of approximately $1.2 million (half of the $2.4 million stepped-up cost from the mother's estate). If the business is sold today for $2.4 million — the current value — the capital gain per sibling is approximately zero. There is no meaningful capital gain tax on an immediate sale at current value.
But if Marco continues to grow the business — and its value increases to $4 million over five years — a sale at that point produces a capital gain of approximately $800,000 per sibling (proceeds of $2 million minus ACB of $1.2 million). The LCGE may shelter a portion if the shares qualify as QSBC shares at the time of sale.
The Dividend Question
Sofia wants annual dividends. Marco's reinvestment strategy minimises distributions. With 50/50 ownership and no shareholders agreement, neither can compel the other. If the board declares dividends, both siblings receive them equally. If the board does not declare dividends, neither receives anything.
This structural equality is the core governance problem: Sofia cannot force dividends; Marco cannot prevent a sale if Sofia chooses to sell her shares to a third party.
The Resolution Options
Option 1 — Buy-sell negotiation: Marco buys Sofia's shares at a negotiated value — the cleanest resolution. Sofia's sale generates a capital gain (proceeds minus $1.2 million ACB). Marco increases his ACB to the total amount paid.
Option 2 — Third-party sale: Both siblings sell to an external buyer. If the business has grown significantly since the inherited ACB, the capital gain is shared — and the LCGE may be available if the shares qualify.
Option 3 — Structured dividend plan as a compromise: The corporation agrees to pay regular dividends — satisfying Sofia's income need — while Marco continues in an operational role. This requires both to agree, typically through a shareholders agreement negotiated now.
What a Shareholders Agreement Would Have Provided
A shareholders agreement established when Marco and Sofia first became shareholders — ideally as part of the estate plan while Aldo was alive — would have addressed: dividend policy, buyout rights triggered by disagreement, valuation methodology, and the mechanism for resolving a deadlock.
The most effective estate planning for a family business addresses the governance transition before the founder dies — not after.
When to Speak With a CPA
For Marco, Sofia, or the estate of any parent with a significant private corporation, the tax implications of the succession are only one part of a conversation that also involves the shareholders agreement, business valuation, and the estate planning framework. A CPA who works alongside the estate lawyer is the right structure for this planning.