Power of Attorney and Private Company Shares – Tax Traps for the Unwary
Trustworthiness and competence are the two most important criteria when deciding whom to appoint as one’s attorney in one’s power of attorney for financial and legal affairs. There are significant other factors that should be considered, though. For example, a potential attorney’s citizenship and country of residence can have significant consequences.
Sections 251(5)(b)(i) and 256(1.4)(a) of the Income Tax Act of Canada create another important consideration. They provide that where an individual has the authority to vote shares in a private company, including having that authority under a power of attorney (a “POA”), the individual with that authority will be deemed to own the shares over which the authority to vote extends. This could lead to significant adverse tax consequences if the person putting a POA in place (the “Adult”) and one of the people appointed to be in charge of the Adult’s affairs (an “Attorney”) both hold shares in a private company.
These negative tax consequences may include the two companies becoming affiliated for tax purposes, resulting in the Canda Revenue Agency requiring the two companies to share a single $500,000 small business deduction instead of each business having its own $500,000 small business deduction. These negative tax consequences may occur even if the Attorney never acts under the Adult’s POA. They may also occur even though the Attorney in question is only an alternate Attorney, and the primary Attorney is still willing and able to act. Similarly, they may occur even though the Attorney is named in a POA that only comes into effect on the Adult’s incapacity (i.e. a “Springing Power of Attorney”).
If one holds or may acquire shares in a private company and any of one’s Attorneys also hold or may hold shares in a private company, one should seek professional tax and legal advice – there are options available. Broadly speaking, they are:
- appointing a different Attorney who does not hold shares in a private company, or
- putting in place two Powers of Attorney – one that explicitly does not allow the Attorney to vote shares in private companies, and a second one that, in the event of the Adult’s incapacity, allows the Attorney to appoint someone (ideally someone who does not have shares in a private company) to vote the Adult’s private company shares.
Failure to account for this aspect of the Income Tax Act is a common error. Unfortunately, powers of attorney are often treated as documents not requiring much care or attention. Given the potentially significant consequences, this aspect of the Income Tax Act can be a particularly nasty trap for the unwary. It is also a great example of why it is so important to have the assistance of knowledgeable tax and legal professionals when putting one’s estate and incapacity planning documents in place, even “just” a POA.
If you have questions about this post or would like assistance with any estate or incapacity planning matters, we would be happy to assist. Please get in touch.