Avoiding Double Taxable on Inherited Corporate Ownership

On the death of an individual, the taxpayer is deemed to have disposed of all capital properties at fair market value (“FMV”) immediately before death.  The adjusted cost base (“ACB”) of the capital property to a beneficiary is the amount of the deemed proceeds, with the exception where the capital properties are transferred to a spouse, which the Act deems each disposition to take place at the property’s ACB.

Because of the deeming rules, a double taxation could occur if the beneficiary is not the spouse of the deceased.  Regard the following example:

• The only asset in the corporation is a real property;
• The original purchase cost was $1,000,000;
• The current fair market value of the property is $15,000,000, and
• The father wills the shares of the corporation to his son.

First incidence of tax:  There would be a deemed disposition at $15,000,000 on death.  Assuming that the deceased taxpayer is unable to claim a capital gains exemption, there will be capital gain of $14,000,000 to an extent that reflects the appreciation in value of the corporation’s underlying assets.

Second incidence of tax: When the corporation subsequently disposes of its underlying assets, it recognizes a capital gain of the same $14,000,000, which is the difference between the proceeds of disposition and the ACB of the property.

There are methods to alleviate part of the double taxation, commonly known as post-mortem plans. However, these plans are beyond the scope of this article. Please consult your tax advisor about your specific situation.

This article is intended for general information purposes only and does not constitute professional advice.  Income tax law and regulation change frequently and the content on this article may no longer reflect the current state of the law. If you have any specific questions, you should consult a professional services advisor or email us for further advice.