Is there an option to minimize tax when shares need to be purchased from another shareholder?
If the owner has other shareholders, there may be a shareholder agreement which dictates the procedure to be used for the sale of the shares. If so, these buy-sell provisions should be reviewed to ensure they provide the minimum tax liability possible given the tax rules of that time.
If the owner is party to a shareholder agreement then one way to minimize the tax on death is to have the agreement call for an optional corporate repurchase of his shares, with the resulting dividend eliminated by making an election for it to be a capital dividend. This will require the agreement of the other shareholders as well as the funding of the buyout with life insurance. It is the life insurance that creates the capital dividend account in the corporation to allow for the tax free distribution. This is a topic on which a tax specialist, insurance specialist and lawyer should be consulted.
Generally, the buyout under this agreement will be by either having the company buy the shares back from the departing shareholder or having the shares bought by another shareholder. A redemption of shares may cause a deemed dividend, while the sale of shares to another person may give rise to a capital gain. However, the capital gain on the sale to another person may also cause a deemed dividend, if the sale is to a corporation with which the owner does not deal at arm’s length.