Consistency Matters

Lessons from Simpson v. Zaste

Business owners should ensure that the various elements of their estate plan, including any shareholders’ agreements, wills, and life insurance policies, are consistent with one another. The recent British Columbia case of Simpson v. Zaste illustrates how the failure to have co-ordinated planning can lead to litigation among surviving family members.

The deceased in this case, John Simpson, died in August 2018. He was a 50% shareholder of North American Gantry & Equipment Services Co. Limited (Gantry). The other 50% interest was owned by an arm’s length party (Lawler). Simpson and Lawler had a shareholders’ agreement that provided, among other things, for a mandatory transfer of a deceased’s shares to the surviving shareholder.

The price payable under the agreement was the shares’ fair market value (determined in Simpson’s case to be $268,750) less the amount of any proceeds payable under policies each shareholder was required to obtain on his life. The relevant policy in Simpson’s case had proceeds of roughly $156,000, payable to Simpson’s widow, Ingrid Zaste, as beneficiary.

The above terms were clear enough, but unusual (the peculiarities of the agreement will be addressed later in this column). The legal issues arose from the fact that, notwithstanding the terms of the shareholders’ agreement, Simpson’s will purported to gift his Gantry shares to his children from a previous marriage, Kirsten and Christopher. This ultimately led to a trial and subsequent appeal.

The trial judge determined that Simpson wanted his children to have an amount representing the full fair market value of the shares, including the $156,000 paid to Zaste from the insurance policy. He stated that the will failed to carry out these intentions because of an “accidental slip or omission.” This led the judge to rectify the will under B.C.’s Wills, Estates and

Succession Act (WESA), and to order that the children receive $268,750, the full fair market value of the shares. Zaste appealed this decision.

In writing the majority decision for the Court of Appeal, Justice Grauer stated that “rectification aligns the will with what the will-maker intended to do, and not what, with the benefit of hindsight, the will-maker should have intended to do.” Accordingly, it was decided that Simpson had intended for his children to have the shares, but not necessarily an amount representing the shares’ full value. Had Simpson wanted his children to receive the larger amount, he could have named them as beneficiaries of his life insurance policy. It was clear to the Court of Appeal, however, that it was always the intention that Zaste receive the insurance proceeds.

In the end, Simpson’s will was rectified by the Court of Appeal, but only to the extent that it permitted his children to receive the purchase price payable by Lawler. Net of certain debts owed by Simpson, this amounted to about $91,300.

WESA is a provincial statute, and the decision itself is only applicable in B.C. However, there are aspects of this case that are instructive for estate planners and insurance advisors in any jurisdiction. Here are some key takeaways.

The first and most obvious point is that wills and shareholders’ agreements should be consistent with one another. This should involve input from the client’s lawyer, accountant, and insurance advisor. The insurance advisor can review the relevant documents, determine they are meeting client objectives, and ensure the insurance is structured appropriately.

Will rectification issues aside, the interplay between the shareholders’ agreement and life insurance in this case was unusual to say the least. The shareholders’ agreement relied on each shareholder insuring himself, with any proceeds reducing the amount payable by the surviving shareholder. Although the arrangement did seem to work in this case, it is not a recommended structure as it leaves the shareholders vulnerable if one or more of them fails to obtain the necessary insurance or keep it in force.

Under a more conventional approach, Gantry would be the owner and beneficiary of a policy on each shareholder. Each policy’s face amount would approximate the fair market value of the insured person’s shares. The agreement would provide for the proceeds to be used, in conjunction with the capital dividend account, for buyout purposes on a shareholder’s death. In Simpson’s case, he could have supplemented this coverage with personal insurance for his wife and/or children.

Certain income tax issues arise in this case. As noted, Lawler’s purchase price for the shares was netted against the amount of insurance proceeds paid to Zaste, which meant that he was able to purchase the shares for significantly less than fair market value. Would the Canada Revenue Agency characterize the insurance proceeds as proceeds of disposition to Simpson’s estate, or consider the estate and Lawler not to be dealing at arm’s length? If so, there could be unintended and potentially punitive tax consequences.

Another tax issue relates to the premiums themselves — which, according to the judgment, were paid by Gantry. Assuming the policies were personally owned, the premium payments could constitute a taxable shareholder benefit, which would not be a deductible expense to the corporation.

Want to see this article online? Go to MyAdvocis.ca/forum-magazine/

BY MARK HALPERN