Purchase a new property between Ontario corporation and its partner's legal and Tax impacts
If an Ontario corporation and its three individual shareholders jointly purchase a new property from a developer in Ontario, with a closing date set three years after the purchase, and during this period, two shareholders decide to sell their shares to the third shareholder, what legal implications arise, and what amendments are necessary to protect the rights of the third partner?
When an Ontario corporation and its three individual shareholders partner together to purchase a new property from a developer, and two shareholders later decide to sell their shares to the third shareholder, several legal and procedural steps must be taken to ensure the rights of the third partner are protected and the transaction is properly documented. Below is an explanation of the legal impact and the amendments required:
??1. Legal Impact of the Share Transfer
- Change in Ownership Structure:?
? The transfer of shares from the two partners to the third partner will alter the ownership structure of the corporation.
The third partner will now hold a larger (or potentially 100%) ownership stake in the corporation, which indirectly affects the ownership of the property.
?- Impact on Property Ownership:?
? Since the property is owned by the corporation, the transfer of shares does not directly change the legal title of the property.
However, the third partner will have greater control over the corporation and, by extension, the property.
?- Tax Implications:?
? The transfer of shares may trigger tax consequences, such as capital gains tax for the selling shareholders, depending on the value of the shares and the adjusted cost base.
The corporation’s ownership of the property may also have GST/HST implications, especially if the property is intended for resale or rental.
?- Contractual Obligations:?
? If the original purchase agreement with the developer includes clauses restricting share transfers or requiring developer consent, the transfer may need to comply with these terms.
??2. Amendments Required to Protect the Third Partner’s Rights
To ensure the third partner’s rights are reserved and the transaction is legally sound, the following amendments and steps should be taken:
?# a. Shareholders’ Agreement Amendment
- If a shareholders’ agreement exists, it must be amended to reflect the new ownership structure. This includes:
? - Updating the ownership percentages.
? - Outlining the rights and obligations of the remaining shareholder.
? - Addressing any buy-sell provisions or restrictions on future share transfers.
?- If no shareholders’ agreement exists, one should be drafted to protect the interests of the third partner and govern the corporation’s operations.
?# b. Corporate Resolutions
- The corporation must pass a resolution approving the share transfer. This resolution should be documented in the corporate minutes and signed by the directors.
?# c. Purchase Agreement Review
- Review the original purchase agreement with the developer to ensure the share transfer does not violate any terms. If the agreement restricts share transfers, the developer’s consent may be required.
?# d. Share Transfer Documentation
- Prepare and execute a share transfer agreement between the selling shareholders and the third partner. This agreement should include:
? - The number of shares being transferred.
? - The purchase price or consideration for the shares.
? - Representations and warranties from the selling shareholders.
? - Indemnification clauses to protect the third partner from any liabilities.
?- File the necessary documents with the Ontario Business Registry to update the corporation’s records.
?# e. Property Ownership Considerations
- Since the property is owned by the corporation, the third partner’s increased shareholding does not directly affect the property’s title. However, the third partner should ensure they have control over the corporation’s decisions regarding the property (e.g., sale, lease, or development).
?# f. Tax and Legal Advice
- Consult a tax professional to understand the tax implications of the share transfer for both the selling shareholders and the corporation.
- Seek legal advice to ensure all documents are properly drafted and filed, and that the third partner’s rights are fully protected.
??3. Additional Considerations
- Financing Arrangements:?
? If the property purchase involves financing, the lender should be notified of the share transfer to ensure compliance with loan agreements.
?- Future Exit Strategy:?
? The third partner should consider their long-term plans for the property (e.g., holding, selling, or developing) and ensure the corporation’s structure aligns with these goals.
?- Dispute Resolution:?
? Include mechanisms in the shareholders’ agreement to resolve potential disputes, such as mediation or arbitration clauses.
?The legal impact of the share transfer includes changes to the corporation’s ownership structure and potential tax implications.
To protect the third partner’s rights, the shareholders’ agreement must be amended, corporate resolutions passed, and a share transfer agreement executed.
Legal and tax advice is essential to ensure compliance and safeguard the third partner’s interests.
?Moe and Maher Dib | CITYVIEW Realty Inc., Mississauga
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Moe Dib, Realtor
(647) 500.2214
Maher Dib, Realtor
(647) 405.2214
Relationship Manager , Syndication Manager , Management Consultant , Fund Manager -Small & Large Corporate & International Banking
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