Buy-Sell Agreements for Law Firms in Canada

Predictable transitions when a partner exits the firm.

A buy-sell agreement is the contract that determines what happens when a partner in a law firm dies, becomes disabled, retires, or otherwise exits. Without one, the surviving partners may end up in business with a deceased partner's spouse, or facing a forced sale under unfavourable terms.

The structure - cross-purchase, entity redemption, or hybrid - drives the tax outcome and the funding mechanics. Properly funded with life and disability buyout insurance, a buy-sell delivers predictable proceeds to the exiting partner's family and clean continuity for the firm.

SG Wealth Management designs and funds buy-sell agreements for Canadian law firms. Coordinate with life insurance for lawyers.

Three Structures

How Buy-Sell Agreements Are Structured

Cross-Purchase

Each partner agrees to buy the others' shares directly. Each partner owns insurance on each other partner.

Entity Redemption

The corporation buys back the exiting partner's shares. The corporation owns the insurance on each partner.

Hybrid

Combines elements of both - typically the corporation has first right, then partners can purchase any remainder.

Cross-Purchase vs Entity Redemption

Cross-Purchase

Surviving partners receive a cost-basis step-up in purchased shares
Each partner owns insurance on every other partner - administratively complex with 3+ partners
Insurance proceeds paid directly to the buying partners
Death benefit avoids the corporate-level CDA and goes straight to partners

Entity Redemption

The corporation owns one policy per partner - simpler with multiple partners
Death benefit credits the Capital Dividend Account, allowing tax-free distribution
No cost-basis step-up for surviving partners
Often combined with criss-cross or promissory note variations

Funding the Agreement

The most common funding mechanism is permanent life insurance on each partner, sized to match each partner's expected share value. At death, the proceeds fund the buyout - either directly to surviving partners (cross-purchase) or through the corporation (entity redemption with CDA flow-through).

For disability buyouts, disability buyout insurance provides a lump sum (or staged payments) when a partner is permanently disabled. This is a separate, specialized product from individual disability insurance and is essential for any partnership of two or more lawyers.

Coordinate with disability insurance for lawyers.

Common Drafting Mistakes

Stale Valuation Formulas

A buy-sell that uses a fixed dollar value or outdated formula often understates current practice value, shortchanging the exiting partner's family.

Underfunded Insurance

Insurance amounts that have not kept pace with practice growth force surviving partners to fund the gap from personal assets.

Disability Trigger Gaps

Many agreements only address death. A partner with a permanent disability may have no exit mechanism without explicit disability triggers and funding.

Tax Treatment Ignored

Choosing entity redemption without modelling the CDA flow-through can leave significant tax savings on the table.

Why Work with SG Wealth Management

SG Wealth Management designs and funds buy-sell agreements for Canadian law firms - working with your firm's counsel and accountant to choose the right structure, set the valuation method, and put the insurance in place to back it.

We review existing buy-sells for funding gaps, stale valuations, and disability blind spots, and we re-engineer the funding stack as the firm and its partners change.

Book a consultation to make sure your firm's buy-sell will actually do its job.