Incorporating your business interests and needs into your estate plan.
While running a business is rewarding, it can also be time-consuming, demanding and challenging. Have you considered who would take on your business responsibilities if you were suddenly unable to do so? Who would manage your business in your absence?
Although it’s easy to get wrapped up in the ongoing operation of a business, you also need to make sure you have a current estate plan that takes your business interests into account.
“It’s critical to think about how your business would continue to operate if you were incapacitated,” explains Abby Kassar, Vice President, High Net Worth Planning Services, RBC Wealth Management Services. “A comprehensive estate plan should contemplate not only the distribution of your assets on your death, but also which individuals or organizations would make decisions on your behalf, from both a personal and financial perspective, if you couldn’t.”
You can achieve this kind of planning using a Power of Attorney. There are generally two kinds of Power of Attorney — a Power of Attorney for property and a Power of Attorney for personal care. Depending on the province or territory where you live, other healthcare directives and instructions for your personal care may be available. For instance, if you live in Quebec, you would prepare a Mandate instead of a Power of Attorney. Consult with a qualified legal advisor about the documentation you may need for your particular area and circumstances.
“It’s not uncommon to procrastinate when considering subjects such as death or incapacity, but a properly prepared Power of Attorney can help ensure not only that your personal and financial decisions are handled appropriately, but also that your business continues to run smoothly,” says Kassar. “This can be important whether you are the sole proprietor of an unincorporated business, a partner in a partnership or an owner or a director of an incorporated company.”
When choosing an attorney, the most important criterion is always to choose an individual who will prioritize your best interests. When you own and operate a private corporation, you should also consider who would be appropriate to take control of your corporation. It is possible to appoint a single attorney or multiple attorneys to work together. Consider appointing an individual or individuals to act on your behalf who understand your business and could work co-operatively with existing directors, shareholders, partners, employees or other staff members who may be involved in day-to-day decision-making.
The right choice can be critical to avoiding disruption in your business and minimizing the impact on your customers.
Other factors also need to be considered. Who would be a good alternate attorney if your primary attorney was unable to fulfill his or her duties? Should you compensate your attorney, and if so, how much? Can your attorney delegate his or her authority? Discuss these questions with your qualified legal advisor and, if appropriate, involve key individuals in your business to keep everyone informed of your decisions.
Consider the range of tasks that would require attention in order to operate your business and manage your affairs if you were unable to take care of them yourself. Aside from using a Power of Attorney in the event of your physical or mental incapacity, you can also choose to have this document take effect in various other situations. Donors have the ability to control the range of authority given to their attorney, as well as when that power is to take effect and for how long. For example, you may wish to have your attorney act in limited circumstances on your behalf while you are away on business or vacation and cannot act personally. The power you give could be limited to one specific absence. You could also choose to have the Power of Attorney take permanent effect if you become incapacitated, as it may be impractical or impossible for you to manage your affairs in the usual way.
If you want your Power of Attorney for property to remain valid during a period of incapacity, the Power of Attorney you prepare must contain a clause that the power granted to the attorney will continue notwithstanding the donor’s loss of mental capacity. This is known as an “Enduring” or “Continuing” Power of Attorney. If you don’t have such a clause, the power you grant to your attorney will cease if you lose mental capacity. This can be precisely the time when you need an effective Power of Attorney.
Another option is to provide that your Power of Attorney will not become effective until you are mentally incapable of managing your finances. If you wish to have the Power of Attorney take effect in such a case, ensure your lawyer is aware of your intention and clearly defines what the triggering event will be. In cases where the document comes into effect on your mental incapacity, consider instructing your lawyer to identify in the Power of Attorney the person or organization responsible for determining your competence and perhaps stipulate an appropriate dispute resolution mechanism in case a conflict or disagreement arises.
When granting a Power of Attorney, you should try to anticipate what issues your attorney may encounter and you may want to give direction as to how to deal with these issues. You can be as broad or as specific as you wish. Remember that your attorney must always adhere to the fundamental principle that he or she is acting in a fiduciary capacity and his or her actions must be in your best interests. Other common law principles also apply to the fiduciary relationship that exists between you and your attorney. These are implied by law and do not need to be expressly included in the Power of Attorney. For example, the common law requires that the attorney avoids conflicts of interest and acts in good faith. Bear this in mind when deciding the terms on which to grant a Power of Attorney and the contingencies for which you wish to empower your attorney.
When thinking about your personal assets, if you want your attorney to have the ability and authority to perform any of the following tasks, you generally need to include an express provision in the document that authorizes them to:
On the other hand, when thinking about your private corporation shares and the management of your corporation, there are additional matters to consider. A couple of significant considerations are discussed below.
Using a Power of Attorney may not be sufficient for your attorney to conduct transactions on non-personal accounts. Typically, corporate accounts can only be accessed by representatives of the corporation, such as an officer or director. When you appoint an attorney, you are authorizing that person or organization to step into your shoes as the owner of your shares and sell, transfer or vote on the shares on your behalf. The Power of Attorney does not give your attorney authority to act as a director of your corporation.
To become a director, your attorney, in his or her capacity as a shareholder under the Power of Attorney, would need to elect himself or herself as director. So if you are a company director, consider this additional step and ensure that your attorney will have the power he or she needs to fulfill the duties you intend for him or her. If there are other corporate shareholders, your attorney may also need their consent to be elected as a director. By planning ahead and informing everyone who is likely to be affected, you can equip your attorney with the powers necessary to act.
If you wish your attorney to perform transactions on your behalf on your non-personal accounts, consult your qualified legal advisor regarding the documentation that may be required.
If you give your attorney broad powers, including the ability to exercise voting rights over your corporate shareholding, Canada Revenue Agency (CRA) may deem that your attorney is the owner of the shares unless the exercise of the voting rights is contingent on your death, bankruptcy or permanent disability.
CRA has held that where you give your attorney the authority to vote shares of a corporation legally controlled by you, your corporation would become associated with any corporation controlled by your attorney. This association of two corporations may have unintended tax consequences. The two corporations may then be required to share the small business deduction limit and this can reduce the tax benefit from which each of the corporations could have benefitted. When including powers in your Power of Attorney, ensure that by appointing the attorney you have chosen, you are not inadvertently associating your corporation with a corporation controlled by your attorney. To minimize the chance of this happening, provide in the document that the Power of Attorney will only take effect in the event that you are permanently disabled.
Note: In the creation or update of a Power of Attorney, it is important to consult with a qualified legal advisor to ensure your wishes and intentions are properly accounted for and that all information is accurately documented.
This document has been prepared for use by the RBC Wealth Management member companies, RBC Dominion Securities Inc.*, RBC Phillips, Hager & North Investment Counsel Inc., RBC Global Asset Management Inc., Royal Trust Corporation of Canada and The Royal Trust Company (collectively, the “Companies”) and their affiliate, Royal Mutual Funds Inc. (RMFI). *Member – Canada Investor Protection Fund. Each of the Companies, RMFI and Royal Bank of Canada are separate corporate entities which are affiliates. “RBC advisor” refers to Private Bankers who are employees of Royal Bank of Canada and licenced representatives of RMFI, Investment Counsellors who are employees of RBC Phillips, Hager & North Investment Counsel Inc. and the private client division of RBC Global Asset Management Inc., Senior Trust Advisors and Trust Officers who are employees of The Royal Trust Company or Royal Trust Corporation of Canada, or Investment Advisors who are employees of RBC Dominion Securities Inc. In Quebec, financial planning services are provided by RMFI which is licenced as a financial services firm in that province. In the rest of Canada, financial planning services are available through RMFI, Royal Trust Corporation of Canada, The Royal Trust Company, or RBC Dominion Securities Inc. Estate and trust services are provided by Royal Trust Corporation of Canada and The Royal Trust Company. If specific products or services are not offered by one of the Companies, clients may request a referral to another RBC partner. The strategies, advice and technical content in this publication are provided for the general guidance and benefit of our clients, based on information believed to be accurate and complete, but neither the Companies, RMFI, nor Royal Bank of Canada, nor any of its affiliates nor any other person can guarantee accuracy or completeness. This publication is not intended as nor does it constitute tax or legal advice. Readers should consult a qualified legal, tax or other professional advisor when planning to implement a strategy. This will ensure that their individual circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change. This information is not investment advice and should only be used in conjunction with a discussion with your RBC advisor. None of the Companies, RMFI, Royal Bank of Canada nor any of its affiliates nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. In certain branch locations, one or more of the Companies may carry on business from premises shared with other Royal Bank of Canada affiliates. Notwithstanding this fact, each of the Companies is a separate business and personal information and confidential information relating to client accounts can only be disclosed to other RBC affiliates if required to service your needs, by law or with your consent. Under the RBC Code of Conduct, RBC Privacy Principles and RBC Conflict of Interest Policy confidential information may not be shared between RBC affiliates without a valid reason.
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