Post-Mortem Tax Planning
Someone has died owning a company. Canada taxed the shares on the day of death; without planning it taxes the same value again when the family takes the money out. The fixes work, and they have deadlines.
What this covers
Post-mortem tax planning stops a private company's value being taxed twice after a death: once as a capital gain on the deceased's final return, and again as a dividend when the money comes out to the family. The two remedies, the subsection 164(6) loss carryback and the pipeline, each depend on steps the estate takes within fixed periods, the first of them inside the estate's first year.
Who this is for
- Executors of an estate that includes shares of a private or holding company
- A surviving spouse or children who have inherited a company
- Lawyers and investment advisers acting for an estate who need the tax steps in the right order
- Owners planning ahead who want their executors to have the best options
What you end up with
The point of the exercise
One layer of tax, not two
The company's value is taxed once, at the lower of the two available rates where the facts allow.
The deadlines met
The first taxation year, the thirty-six-month window and the filing dates, set out in writing and worked to.
An executor who is protected
Returns filed, elections made, clearance certificate in hand before the estate is distributed.
Post-Mortem Tax Planning in detail
The double tax, in one example
A holding company worth $4 million, shares that cost almost nothing. The final return reports a $4 million gain: tax in the region of $1.1 million at British Columbia's top rate, owed by an estate with no cash. So the company pays the money out, and the payment is taxed again as a dividend, another $1.5 million to $2 million. Left alone, the two layers can take 60 to 75 cents of every dollar the company held.
Two remedies, and a hybrid
The loss carryback: the estate has the company redeem its shares within the estate's first taxation year, and subsection 164(6) carries the resulting loss back to wipe out the gain on the final return. The value is taxed once, as a dividend. The pipeline: the estate moves the shares into a new corporation for a note that is repaid over a year or more, and the value comes out once, at capital gains rates. Most estates with a substantial company use a hybrid of the two, and where a spouse inherits the answer is different again.
What the executor must not do yet
Have the company pay a dividend, redeem shares, sell assets or distribute anything before the plan is set. The order of those steps decides the tax. What should happen first: a valuation of the shares at the date of death, the company's last statements and returns gathered, and the estate's year-end chosen, because the first taxation year is the one the carryback lives in.
How we work with the estate
Alongside the estate's lawyer and the executor, and often the adviser who holds the company's portfolio. We model the routes with the actual figures, set the dates each step must happen by, prepare the final return, the estate returns and the elections, and stay with the file until the clearance certificate that protects the executor is in hand.
Diarise these
The deadlines that cost money
| Filing or payment | Due |
|---|---|
| Final (terminal) return | April 30 of the year after death, or six months after death if later |
| Subsection 164(6) loss carrybackElected on that year's estate return, with an amended final return. | Shares redeemed within the estate's first taxation year, at most twelve months after death |
| Estate (T3) return | Ninety days after the estate's year-end |
| Graduated rate estate statusAfter that the estate pays the top rate and loses the remedies tied to the status. | Ends thirty-six months after death |
| Clearance certificate | Before the final distribution to beneficiaries |
Deadlines shift when a due date falls on a weekend or holiday, and the rules change with each budget. Confirm your own dates before relying on them.
How it runs
What working together looks like
Stop, and take stock
Nothing redeemed, sold or distributed until the plan is set. What the company holds, its tax accounts, who inherits.
Value at the date of death
Fixes the gain on the final return and the estate's cost base for everything that follows.
Choose the route and execute inside the windows
Loss carryback, pipeline or hybrid, with the year-end, redemptions, returns and elections done on time.
Close with a clearance certificate
Obtained before the final distribution, so the executor is not personally liable for tax found owing later.
Questions
Post-Mortem Planning, answered
General information about how the rules work, current at the time of writing — not advice about your situation. Speak to Ray Loucks before acting on any of it.
My parent died owning a company. What do I do first?
Do nothing irreversible: no dividend, redemption, sale or distribution until a plan is set. Get a valuation of the shares at the date of death, gather the company's last statements and returns, and speak to a tax adviser within the first few months. The remedies depend on the estate's first taxation year, and that clock is already running.
Is it too late if it has been a year?
The loss carryback is probably gone, since it has to be done in the estate's first taxation year. A pipeline may still be available while the estate holds the shares, and the estate keeps graduated rates for thirty-six months from death. Worth a conversation; just a much earlier one next time.
What is a pipeline?
The estate transfers the inherited shares, whose cost was stepped up on death, to a new corporation in exchange for a note, and the note is repaid over time from the company's cash. The value comes out once, at capital gains rates. The Canada Revenue Agency accepts it provided the company carries on for a period and the money is not paid out too quickly.
Does the estate file its own tax return?
Yes. The estate files a T3 return for each of its years, due ninety days after the year-end the executor chooses. The first one carries the graduated rate estate designation and, if used, the loss carryback election. The deceased's final return is separate.
My spouse inherited everything. Is there anything to do now?
The spousal rollover defers the tax, so there is no bill now. This is the moment to plan the second death: consider electing out of the rollover on some shares so the deceased's capital gains exemption is used, review any estate freeze in place, and set up the survivor's will and structure so these remedies are available later.
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