Exiting or Onboarding Shareholders, Directors, or Officers in Canada
Corporate changes involving exiting or onboarding shareholders, directors, or officers are routine and also crucial events in the life of a corporation.
Shareholders may exit a corporation for various reasons, including selling their shares, transferring ownership, retirement, or disagreement with corporate decisions. Exiting shareholders typically involve selling their shares to existing shareholders, third parties, or back to the corporation itself through share buyback arrangements.
Shareholders
It is important to note that adding or removing shareholders is the most complex of these reorganizations. By contrast, removing an individual from his positions as director and officer is very easy and generally inexpensive. Since these are elected positions, all the individual must do is resign by signing a short resignation which we then file with the government. However removing an individual from his position as shareholder is more complex. A shareholder is a position of ownership, and so one cannot simply ‘resign’ from being an owner. Consider it akin to owning a house; you cannot resign from owning a house – you must find someone to purchase the house from you. The issue becomes complicated because tax law requires all transfers of capital property to be at fair market value. In other words, another shareholder would have to purchase the exiting shareholder’s shares at fair market value which may trigger a capital gain to the exiting shareholder. To the extent it does, the exiting shareholder must pay tax on that capital gain. The mechanism is further frustrated by the fact that a shareholder cannot simply exit alone – he or she must find another shareholder or a third party to purchase those shares and so this manufacturer has to be done in cooperation and agreement with other parties.
Directors
Directors may exit a corporation due to resignation, removal, retirement, or other reasons. When a director exits, the corporation must update its records and file necessary paperwork with government authorities. A director is not an owner; a director is the highest ranking employee of a corporation that stewards the business of a corporation. No one can force another to act in the position of a director and he or she may resign at any time by signing a resignation and then filing the Form 1 Notice of Change with the OBR or Form 6 with Corporations Canada. This step is critical as directors assume liability in respect of the corporation, specifically for unremitted trust funds (GST/HST or payroll tax) to the CRA. For this reason, it is extremely important that an exiting director file the forms with the government.
Officers
Officers, such as the CEO, CFO, or COO, may exit a corporation due to resignation, termination, or other reasons. The corporation must ensure that necessary paperwork is filed, update internal records, and appoint replacements to maintain the effective operation of the business. Similar to a director, an officer may resign at any time however a form must be filed with the OBR for provincial companies. No form is required for federal companies.
In summary, corporate changes involving exiting or onboarding shareholders, directors, or officers are significant events that require careful planning, compliance with legal requirements, and effective communication with stakeholders to ensure a smooth transition and the continued success of the corporation. Speak to one of our business lawyers for assistance with these maneuvers.
