Anonymised, illustrative composite. Two equal shareholders of a specialty parts distributor signed a shareholders' agreement in 2009 fixing the death buyout at book value. One died in 2026. The estate's tax bill was not calculated on the price the agreement paid it.
At a glance
Two friends had built a specialty parts distributor from a garage into a $6-million-revenue business. In 2009, on a lawyer's standard-form advice, they signed a shareholders' agreement with a mandatory buy-sell on death: the survivor's holding company would buy the deceased's shares at “book value per the most recent audited financial statements,” funded by a small term life policy sized to that same book-value figure. Nobody revisited the number for seventeen years.
One of the two died in early 2026. The formula did exactly what it was written to do: it forced a sale, at a defined price, funded by an existing policy. On paper, this looked like succession planning working as intended.
Book value at death, per the most recent audited statements, was $820,000 for the whole company — $410,000 for the deceased's half. The insurance had been sized to that figure years earlier and had never been increased. The survivor's corporation paid the estate exactly $410,000, exactly as the agreement required, and the buyout closed within weeks.
The estate's terminal return told a different story. An independent valuation obtained for the return — standard practice on a private-company death — put the fair market value of the same 50% block at $1,640,000, roughly four times the formula price. Retained earnings, goodwill and an appreciating customer base had never been reflected in book value, because book value was never designed to track any of that.
Cash actually received by the estate: $410,000. Deemed proceeds for tax purposes: $1,640,000. The $1,230,000 gap is not a paperwork discrepancy — it is the entire distance between what a private company's balance sheet says its shares are worth and what a willing buyer would actually pay for them, and the estate was taxed on the second number while receiving the first.
s.70(5)(a) is unambiguous on this point and does not defer to what any contract says: “the taxpayer shall be deemed to have, immediately before the taxpayer's death, disposed of each capital property of the taxpayer and received proceeds of disposition therefor equal to the fair market value of the property immediately before the death.” Fair market value, not contract price. The section does not ask what a 2009 shareholders' agreement says the shares are worth; it asks what a willing buyer would actually pay, and it deems that amount received whether or not it was.
The buy-sell formula, meanwhile, is answered by ordinary contract law rather than by the Income Tax Act. Absent fraud, unconscionability or some other vitiating factor, Ontario courts enforce a shareholders' agreement's pricing mechanism as written — a stale formula is still a binding one. Nothing in the Act overrides a private contract's price, and nothing in contract law rewrites a formula because it has gone out of date. Two entirely valid bodies of law measured the same shares and produced two entirely different numbers, and neither yielded to the other.
The standard protection against exactly this — and the one this agreement never had — is a mechanism that keeps the buy-sell number honest against the tax number: a formula tied to a current independent valuation rather than book value, refreshed on a fixed cycle, or insurance sized to fair market value rather than to book value and increased as the company grows. None of that rewrites s.70(5); it simply keeps the cheque and the tax bill in the same neighbourhood.
The buyout itself was not disturbed — the formula was valid and had been followed. What changed was how the estate funded the resulting tax liability: it borrowed against other estate assets, at commercial rates, to cover the gap between the $410,000 it actually held and the tax generated by $1,640,000 of deemed proceeds, and probate was delayed while that financing was arranged.
The survivors on the remaining side of similar agreements — a common pattern once one shareholder's estate had lived through this — renegotiated their own formula going forward, moving from book value to a valuation refreshed every three years and increasing the funding insurance to match.
Had the estate lacked other assets to borrow against, the shortfall would have had to come from somewhere else entirely — a distress sale of estate property, a payment arrangement with CRA, or the beneficiaries funding the balance personally out of an inheritance that, on paper, was supposed to already be resolved by the 2009 agreement. The buy-sell formula was meant to remove uncertainty from a death in the business. Left unrevisited for seventeen years, it replaced one uncertainty with another.
The tell was the date on the insurance policy: issued in 2009, for an amount that had never been increased, sized to a book-value figure that had never been the measure CRA would use. A funding number that stops moving while the business keeps growing is not a funded plan — it is a snapshot of what the company was worth the year someone bought the policy.
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