SME Shareholders: The Agreement, Death and Life Insurance

There were two of them, equal partners, for twenty-two years. One handled the job sites, the other the numbers. The first one dies in February.

Six weeks later, his widow is sitting in the meeting room. She has never worked in the business, she has no desire to work in it, and she now holds half the shares. The survivor would like to buy them. She would like to sell them. Nobody agrees on the price, and nobody has the money.

Éducaloi sums up the risk in one sentence: "if the agreement is silent on the subject, you risk becoming the business partner of your co-shareholders' heirs or family members if something goes wrong!"

This is not an insurance problem. It is an agreement problem, which insurance then serves to fund. The order of the two matters.

Without an agreement, the shares follow the estate

Corporate shares are property like any other. They enter the patrimony of the person who died and follow the path of any estate.

Article 625 of the Civil Code of Québec provides that the heirs are, by the death of the deceased, "seized of the patrimony of the deceased, subject to the provisions on the liquidation of successions." It is the liquidator — Québec's term for what the rest of Canada calls an executor — who administers in the meantime, and the property is then delivered to the heirs. Our guides on the liquidator's role and on dying without a will describe that route.

Nothing in any of it takes the business into account. The heirs become shareholders because that is what the law provides, not because anyone judged it to be a good idea. And while the liquidation runs its course — inventory, debts, tax certificates — the business has to keep operating.

The shareholders' agreement: what it settles

Éducaloi describes the shareholders' agreement as an understanding among the owners of a business that sets the rules applying in particular to decision-making, future investments, each person's involvement and "the circumstances that may require a person to sell their shares to the others."

Three clauses bear directly on the death scenario.

Forced sale. Éducaloi: "You can provide that certain situations, such as death, disability or incapacity, will automatically trigger the forced sale of a person's shares."

Control over who comes in. You can agree "that it will be prohibited to sell shares in the business to a person who does not already hold some."

Valuation. You can "specify in advance how each share in the business will be valued before being sold, for example by submitting it to the valuation of an independent expert." It is this clause that avoids the impossible negotiation in the month following a death.

A word about vocabulary, because it creates confusion. The Business Corporations Act provides in section 213 for a particular arrangement, the unanimous shareholder agreement: the shareholders may, "if all of them consent," enter into a written agreement "restricting or withdrawing the powers of the board of directors to manage the business and internal affairs of the corporation or to supervise such management." Section 214 specifies that in that case the rights, powers, duties and liabilities of the directors devolve to the parties to the agreement, and that the directors are relieved of them to the same extent. Not every shareholders' agreement is a unanimous agreement within the meaning of those sections: it is a structural choice, and it is discussed with a lawyer or a notary.

The problem life insurance solves: the money

A buy-sell clause says who buys. It does not say with what.

This is the point at which many agreements fail in practice. The surviving shareholder is obliged to buy, the estate is obliged to sell, the price is set by the agreed formula — and the money exists nowhere. Borrowing that amount at the worst moment in the life of the business, with one executive fewer, is not a reassuring proposition for a lender.

Life insurance is the tool advisors use to fill exactly that hole: it produces cash at the precise moment the obligation to buy is triggered.

Two structures come up constantly, and they are not equivalent.

	Each shareholder insures the others	The corporation holds the contracts
Who holds the contract	The shareholders, among themselves	The corporation
Who receives the money at death	The surviving shareholders	The corporation
Who buys back the shares	The surviving shareholders, personally	The corporation, by redeeming its own shares
Complexity	Grows quickly with the number of shareholders	Centralized

The choice between the two depends on the number of shareholders, their ages, the capital structure and above all the tax treatment that follows. We do not settle it here: that is a decision for a tax specialist, made with the lawyer or notary who drafts the agreement.

The capital dividend account

Insurance money paid to a corporation does not behave like money paid to a person. The tax mechanism that governs what happens next has a precise name, and it is worth knowing before the meeting with the accountant.

Québec's Taxation Act defines in section 570 the "capital dividend account" of a corporation as "the amount determined under the rules prescribed for that purpose." This account is not a bank account: it is a notional balance, calculated according to regulatory rules.

Its usefulness comes from section 502 of the same Act. Revenu Québec describes form CO-502 as follows: it "is intended for any private corporation that, under section 502 of the Taxation Act, elects to have a dividend deemed to be a capital dividend." It is that election, made by way of a form, that allows a corporation to pay an amount to its shareholders under a treatment different from that of an ordinary dividend.

What you need to take away is not the calculation, which is technical and changes with the tax rules. It is this: the route the money takes between the insurer, the corporation and the individuals is not neutral, and it is planned beforehand, not afterwards. Our guide on the taxation of life insurance proceeds deals with the simpler case of a personally held policy.

The other bill: the deemed disposition of the shares

The death of a shareholder also triggers a personal tax bill, and it is often the bigger one.

At death, the tax authorities treat property as sold at fair market value, which triggers a capital gain on everything that has gained value without ever having been sold. The shares of a business built over twenty years are the perfect example: there was never a sale, never any cash received, and yet the tax is payable in the final income tax return. Our guide on taxes at death details this mechanism, Revenu Québec's deadlines and the certificates the liquidator has to obtain before any distribution.

The problem is therefore twofold, and the two parts are settled with different sums: the business needs cash to buy back the shares, and the estate needs cash to pay the tax. Planning that deals only with the first leaves the second to the heirs.

What has to be coordinated

Four documents speak about the same person, and they have to say the same thing.

The shareholders' agreement determines what happens to the shares. The will determines who inherits the rest and names the liquidator — our guides on the forms of will and on the liquidator explain the forms. The beneficiary designation on the insurance contracts decides where the money goes, and in Québec it follows particular rules set out in our guide on beneficiary designation. The protection mandate, finally, deals with incapacity rather than death — an eventuality the agreement can also address.

A contradiction between these four documents is almost never discovered while the person concerned is alive. Éducaloi ends its article on the shareholders' agreement with the only recommendation that makes sense: "Drafting a shareholders' agreement can be complex. Talk to a notary or a lawyer to find out more!"

Frequently asked questions

There are two of us and we trust each other. Is this really necessary?

The agreement does not protect you against your co-shareholder's bad faith, it protects you against what happens when they are no longer there. The people you will find yourself in business with are not the ones you signed with, and they did not choose any of it either.

Can the agreement force the estate to sell?

Éducaloi indicates that an agreement can provide that death automatically triggers the forced sale of the shares. The exact scope of such a clause depends on how it is drafted and on the capital structure: that is precisely why it is drafted by a legal professional.

How much insurance is needed?

That depends on the value of the shares under the valuation formula chosen, on the expected tax and on what the business otherwise owes. We put no figure on it and we recommend no product. Our guide on calculating your insurance need presents the general methods; the case of a corporation is worked out with a tax specialist.

What if a shareholder is not insurable?

That is a possibility to provide for in the agreement rather than discover after the fact, for example by providing an alternative method of financing. Our guide on being declined for insurance explains what a refusal means and what avenues remain open.

Does this text replace professionals?

No. We are neither a broker, nor an insurer, nor tax specialists, and we give no advice. This file brings together three professions: a lawyer or a notary for the agreement, a tax specialist or an accountant for the structure, and a licensed financial security advisor for the contracts.

Sources

• Éducaloi, "Convention entre actionnaires : en affaires, ensemble": https://educaloi.qc.ca/capsules/convention-entre-actionnaires-en-affaires-ensemble/ (accessed August 11, 2026)
• Business Corporations Act, CQLR chapter S-31.1, sections 213 and 214: https://www.legisquebec.gouv.qc.ca/fr/document/lc/S-31.1 (accessed August 11, 2026)
• Taxation Act, CQLR chapter I-3, sections 502 and 570: https://www.legisquebec.gouv.qc.ca/fr/document/lc/I-3 (accessed August 11, 2026)
• Revenu Québec, form CO-502, "Choix concernant un dividende payé à même un compte de dividendes en capital": https://www.revenuquebec.ca/fr/services-en-ligne/formulaires-et-publications/details-courant/co-502/ (accessed August 11, 2026)
• Civil Code of Québec, article 625, consolidated text, LégisQuébec: https://www.legisquebec.gouv.qc.ca/fr/document/lc/CCQ-1991 (accessed August 11, 2026)

This text presents general information about Québec law and taxation. It is neither legal advice, nor tax advice, nor insurance advice. For your own situation, consult a lawyer or a notary, a tax specialist and a licensed financial security advisor.