Post-Mortem Plan – Estate income tax options

Double taxation can arise and has been briefly discussed in previous articles, yet this problem can be negated if the shares are to be sold to a third party.   The objective of post-mortem planning in respect of shares of a corporation to be wound up is to reduce or eliminate the possibility of double taxation, and to remove the assets of the corporation at the lowest possible rate of tax.

The basic planning strategies are as follows:

Capital Loss Planning:  Within a year of death, the estate redeems the shares, causing a deemed dividend with the resultant capital loss to be carried back against the deceased’s terminal tax return.  The estate pays tax at the dividend rate on the extraction.

Pipeline Planning:  Pipeline planning uses the adjusted cost base created by the deemed disposition on death to extract the surplus as a tax-free return of paid-up capital or a promissory note.  If the assets in the corporation are tax-paid, the pipeline plan is very tax-efficient.  The estate pays tax at the personal capital gains rate on the extraction.

Bump Planning:  The adjusted cost base generated on death is transferred to the non-depreciable capital property of the corporation, eliminating future capital gains tax in the corporation.

In choosing a plan or combination of the plans for a particular situation, the advisor has to perform an analysis considering all other factors such as RDTOH, GRIP and CDA in the corporation, timing, any concerns of Section 84.1, 84(2), PUC of the issued shares, any insurance proceeds are available, potential stop loss rules to apply, as well as the deceased’s eligibility for QSBC share exemption.  Furthermore, the shareholders’ agreement must be reviewed to ensure effectiveness.

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.