However, other shareholders do not receive an increase in their tax bases in the company`s stock. This contrasts with an agreement on share repurchases which provides that other shareholders acquire the shares individually and receive a corresponding increase in their tax bases. In addition, repayments of shares considered to be distributions of non-liquidable businesses may result in a taxable dividend for the beneficiary if the transaction is not considered a sale of shares in accordance with one of the exceptions provided in s. 302 or 303. In the context of a closely owned company, a purchase/sale contract is a contract between the shareholders or between the shareholders and the company. The contract provides that a shareholder`s shares are sold (or, at the very least, put up for sale) following the arrival of a particular event. These events generally include death, disability and retirement, but may also include circumstances such as divorce, bankruptcy or inability to practice. Agreements can also be conceived as a right of pre-emption if one or more shareholders wish to sell their shares. One of the drawbacks of a purchase/sale contract is that the payment of premiums on life insurance financing the purchase/sale contract is not available for the commercial activities and personal expenses of shareholders. In addition, circumstances may change after the adoption of the purchase/sale contract, leading buyers to regret the obligation to purchase the shares of a retractor owner. As part of a share withdrawal agreement, the company owns and beneficiaries of the life insurance that funds the agreement.
Many closely managed companies have purchase/sale agreements to assess and purchase the shares of a deceased or disabled shareholder or a shareholder whose employment ends in the company. When more than two shareholders are involved, and particularly when life or disability insurance is used to finance the agreement, these buybacks are often structured as share withdrawals (paid with a corporate dollar) and not as cross-purchase of shares between shareholders. A share repurchase/sale agreement is a contractual agreement between the shareholders and the company in which the company is required to repurchase the shares of a deceased or disabled shareholder. After the death or disability of a shareholder, the stock of shares of that shareholder must be returned to the company in accordance with the terms of the purchase/sale contract. If the share withdrawal contract is funded by life or disability insurance, the company pays the premiums.