Area of Law: Business Law
Answer # 0253
Effects of transferring sharesRegion: Ontario Answer # 0253
Share transfer or issuance by corporation
Corporations are considered legal entities regardless of who the shareholders are. Therefore, transferring shares does not change or nullify the legal structure of a corporation. However, the transfer of existing shares, or the issuance of new shares can affect how a corporation is managed and its value.
A corporation may transfer (buy or sell) its shares for a number of reasons, such as:
- to raise new capital,
- to reorganize the company,
- to bring in new partners with fresh ideas and new skills, and
- to reward achievements of employees.
Effects of transferring shares for private companies
In many privately held corporations, the owners of the corporation also take an active role in running the day-to-day affairs of the business. If a shareholder leaves the business, then there may be some significant changes in the way that the business is run. The proportion of shares owned by shareholders generally determines who controls the corporation.
Effects of transferring shares for public companies
When a publically funded company trading shares on the stock market sells its shares, this can have a dramatic impact on the price of shares, and in turn, the value of the company. Similarly, the transfer of shares by the shareholders can change the value of the company.
Depending on if the share price rises or falls, it may result in:
- company lay-offs
- a change in other stock prices in similar industries
- higher dividends paid to shareholders
- increased capital for new products
- possibility of a company merger or takeover
- increased or decreased interest from investors
Effects of transferring shares for shareholders
Tax implications for shareholders
One of the biggest effects of the transfer of shares has on a shareholder is the tax implications.
If a shareholder sells shares for a price greater than the purchase price, the gain is considered a capital gain. Capital gains are a type of taxable earnings under the Income Tax Act. Shareholders selling shares in a private corporation may be able to take advantage of the lifetime capital gains exemption. Shares in public corporations do not qualify for the capital gains exemption.
If a shareholder sells shares for a price lower than the purchase price, the loss is considered a capital loss. Capital losses can be deducted from capital gains for the same year. If the calculation results in a loss, it is called a net capital loss to reduce a capital gain in any of the three previous years, or in any future year.
Ownership, liabilities and assets
Purchaser of shares
When someone buys shares, they become an owner of the corporation. Since the rights attached to the shares are also transferred, the new shareholder will have the same rights as the previous shareholder. For example, the shares may come with voting rights or rights to receive dividends in priority to other shareholders who have a different class of shares in the corporation.
If the corporation owns assets, such as real property, vehicles, intellectual property, inventory, and so on, the shareholder has a proportionate share of these assets. Conversely, if the corporation has liabilities, the value of the shares is proportionately decreased, but only up-to the amount the shareholder paid for the shares. Shareholders are not personally responsible to pay for business losses or other liabilities of the corporation.
One of the main benefits of the corporate form of business is that the shareholders, directors and officers of a corporation are not usually held personally responsible for the debts and obligations of the corporation. However, if a shareholder, officer, or director has personally guaranteed a loan or debt, he or she will be held personally responsible for it. In addition, there are some situations in which the directors of a corporation can be held personally responsible.
Under the law, directors are liable for:
- corporate income tax,
- GST and HST on its sales,
- payroll remittances, including the employer’s portion of CPP and Employment Insurance, and
- environmental issues.
Seller of shares
The person (or entity) that sells the shares receives payment and is no longer entitled to any benefits associated with the shares (unless accrued prior to the sale). However, if the shareholder had guaranteed a loan or other debt prior to the sale, it is up to that person to ensure that they are no longer responsible for it. The best approach is to ensure any personal obligations are removed before the share sale is completed. In addition, if the shareholder was also an officer or director of the corporation, they will likely be held responsible for any wrongdoing while acting in such capacities. Again, it is best to be removed from these positions and obtain a release from the new owners prior to the share sale being completed.
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