Taxation at Death and Post-Mortem Planning
Death triggers deemed disposition creating capital gain personally. Assets inside corporations remain at original cost. When sold later, same gain taxed again. Custom-written for CPAs.
Grace Chow
Understand terminal return rules, deemed dispositions, and five strategies eliminating double taxation. You will learn subsection 164(6) capital loss carryback requiring first-year GRE realization, pipeline withdrawals using high ACB, paragraph 88(1)(d) bump without time limits, and loss reduction formulas restricting carryback amounts.
Death triggers deemed disposition of capital property at fair market value. You pay tax on the gain personally. But assets inside corporations do not get revalued. When the corporation later sells those assets, tax applies again on the same gain. Combined rate reaches 55% for capital property and 81% for land inventory. The estate inherits shares at stepped-up cost, but that high cost base means nothing when corporate assets sell at their original low values.
Terminal tax returns follow special rules. Income accrues to date of death. RRSP and RRIF values become taxable unless transferred to a spouse or dependent child. Rights or things can be filed on a separate return with additional graduated rates and personal exemptions. Returns are due the later of April 30 or six months after death. Tax from deemed dispositions can be paid over ten years with security. Without a clearance certificate, executors face personal liability for unpaid taxes.
Double taxation destroys value unless you act. This session teaches you five proven strategies eliminating the double tax:
- Sell corporate shares directly to third parties avoiding asset-level tax entirely
- Pipeline using high ACB from deemed disposition withdrawing corporate funds tax-free over time
- Subsection 164(6) capital loss carryback from share redemptions in first estate year
- Use capital losses against investment gains in the estate or distribute shares to beneficiaries
- Paragraph 88(1)(d) bump stepping up non-depreciable capital property without time limits
Each strategy solves different problems. Pipelines work perfectly for active businesses continuing operations but fail when claiming capital gains exemptions due to section 84.1. Capital loss carrybacks under subsection 164(6) must happen in the estate's first taxation year creating tight deadlines. The paragraph 88(1)(d) bump has no time limit but only applies to non-depreciable capital property like land and shares. Knowing which strategy fits your client's situation prevents costly mistakes.
Post-mortem planning saves significant tax when executed properly. This program gives you the technical framework and practical judgment to protect your clients' estates from unnecessary double taxation.
Seminar Snapshot
This program covers terminal tax return requirements through advanced post-mortem planning eliminating double taxation. Learn at your own pace with instant access.
Taxation at Death and Post-Mortem Planning
Course Syllabus
Terminal Tax Return and Deemed Dispositions
Filing requirements, income inclusion, and special rules at death
Legal Representative Responsibilities
- Filing all terminal tax returns for deceased
- Paying all taxes owing
- Post-mortem estate planning
- Estate tax returns
- Advising beneficiaries of taxable income
Terminal Return Income Inclusions
- Income earned until date of death on cash basis (employment, interest, dividends, capital gains)
- Accrual of periodic payments (salary weekly or monthly, rental income, interest income)
- Dividend income normally not periodic except preferred shares with stated dividend at fixed intervals
- Capital property and land inventory deemed disposed at FMV (unless spousal rollover)
- RRSP and RRIF values realized as income (unless transferred to spouse RRSP/RRIF or dependent child RRSP)
Rights or Things
- Unpaid amounts entitled to at date of death filed on separate elective return
- Separate personal exemptions and graduated rates (not medical expenses or donations)
- Examples: unpaid bonus, declared but unpaid dividends, matured but uncashed bond coupons
Deemed Disposition Rules
- Fair market value deemed proceeds unless spousal trust vesting within 36 months
- Depreciable property: recapture or terminal loss
- Recipient ACB equals FMV
- New UCC stepped up to FMV
- Spousal rollover: recipient assumes deceased's ACB
Terminal Return Filing Requirements
- Due later of April 30 following year or 6 months after death
- Extended to June 15 or 6 months if deceased or spouse has business income
- Tax due 6 months after death if person died after October (no extension for spouse)
- File on time even if incomplete, common to amend several times
- No instalments required post death, no interest charged for deficient instalments if earlier instalments paid correctly
Payment Options and Clearance
- Tax from deemed disposition payable in 10 annual instalments with acceptable security, interest charged on outstanding balance
- Clearance certificate (Form TX19) recommended or executor personally liable for unpaid taxes
- File after terminal return assessed and taxes paid
Special Rules and Considerations
RRSPs, reserves, AMT, executor's year, and death benefits
RRSP and RRIF Rules
- Full value included in terminal return income
- Exceptions: transfer to surviving spouse RRSP/RRIF, transfer to dependent child/grandchild RRSP
- Decline in value from death to distribution deductible on terminal return (time limits apply)
- Example: $400K RRSP at death, distributed at $390K, $10K decline deductible
Other Points at Death
- Rollover of farming/fishing property to child, grandchild, great-grandchild with no amount limitation (family must be actively involved)
- SBC shares eligible for capital gains exemption if qualified at any time in 12 months before death
- Stock option benefit for CCPC with deferred taxation realized at death (50% deduction if eligible)
- Vested stock options deemed realized at FMV, special rule allows adjustment for decline in value within first estate year
Death Benefits
- Up to $10,000 excluded from income of recipient
- Amount paid by employer deductible to employer
- No requirement benefit paid to surviving spouse or family member
- If sole recipient is surviving spouse, $10,000 exclusion applies fully
- If multiple recipients, $10,000 reduced by amount to spouse and prorated among others
- CPP death benefit fully taxable to estate as CPP payment (not death benefit per definition)
Reserves
- Generally disallowed in year of death
- Exception: right to receive amount transferred to surviving spouse or spousal trust resident in Canada with joint election (Form T2069)
- When election made: reserve allowed for deceased in terminal year, deemed claimed by person receiving for future inclusions
- Eligible reserves: business income reserves, unearned commissions, capital gains reserves, replacement property reserves
Alternative Minimum Tax
- AMT not applicable in year of death
- Prior year minimum tax credits carry over claimable only on terminal return (not elective returns)
- AMT credits not claimed on terminal return are lost
- If tax payable on terminal return insufficient to claim full AMT carryover, increase income by not claiming spousal rollover
Executor's Year
- Executor cannot be forced to pay legacies within one year of death under common law (income not payable)
- Income in first year can always be taxable in estate
- Carefully select year-end for estate: short year allows four taxation years of graduated rates instead of three
- Main issue: capital loss creation in first estate year carriable back to deceased capital gains
Double Taxation Problem
Understanding how and why double taxation arises with corporate holdings
How Double Taxation Arises
- Deceased holds shares FMV $100, ACB $0 in investment holding company
- Death triggers deemed disposition, estate pays tax on $100 gain
- Estate inherits shares ACB $100, FMV $100
- Underlying corporate assets not revalued (still ACB $0)
- Corporation sells investments paying tax on $100 gain
- Company pays proceeds to estate as dividend
- Both deceased taxpayer and company pay tax on same gain
Tax Cost of Double Taxation
- Capital property: deceased capital gain 26.5%, corporation gain and tax 26.5%, dividend refund reduces net corporate tax to 10%, estate dividend 47% (ineligible) or 39% (eligible), total tax 55.5%
- Land inventory: deceased capital gain 26.5%, corporation taxable income 26.5% with no dividend refund, estate dividend 47%, total tax 81%
- Capital loss arises on share redemption in estate, must have plan to use loss or disaster results
Five Strategies Eliminating Double Taxation
Planning techniques to avoid or minimize double tax
Strategy 1: Sell Corporate Shares Not Assets
- No double taxation when shares sold to third party
- Generally not practical for investment holding company or real estate
- Practical only for active business company
- Purchaser may prefer assets over shares making approach impossible
- May need to reorganize corporate group before sale if holding company owns operating company with other assets
Strategy 2: Use of High ACB (Pipeline)
- Estate has high ACB in shares from deemed disposition at death
- Incorporate new company (Newco), transfer shares to Newco for Newco shares
- Newco winds up or amalgamates with operating company
- Liquidate operating company with note to Newco equal to ACB
- Note paid over time using company funds, no taxable dividend
- Caution: deemed dividend under subsection 84(2) if winding up within 24 months of obtaining control
Strategy 3: Subsection 164(6) Election (Capital Loss Carryback)
- Estate redeems shares creating deemed dividend and capital loss
- Capital loss must be realized within first taxation year of estate (not 12 months if shorter period adopted)
- Capital loss carriable back to terminal return only (not year preceding death)
- Must file amended terminal return
- Most useful when shares redeemed offsetting deemed capital gain on terminal return
- Estate reports deemed dividend taxable to estate or beneficiary if paid out
- Tax saved eliminating capital gain balanced against tax on dividend from redemption (note significance of CDA and RDTOH)
Subsection 164(6) Election Requirements
- Prescribed manner: letter from legal representative specifying elected loss amount, schedule of estate capital losses/gains
- Prescribed time: file by later of terminal return due date or estate's first year tax return due date
- Caution: short taxation year of estate shortens timeframe for realizing losses
- Only available for GRE, if GRE not created or disqualified planning unavailable
Strategy 4: Use Capital Loss Against Investment Capital Gains
- Estate holds company shares plus other assets that appreciated post-death
- Company sells assets, shares redeemed creating deemed dividend and capital loss
- Estate uses capital loss on redemption to shelter capital gain on sale of other assets
- If estate has no gains, distribute shares to beneficiaries before redemption allowing them to realize capital loss
- Not viable if estate or beneficiaries lack capital gains
- May claim allowable business investment loss (ABIL) deductible against other income if shares qualify as SBC (examine carefully for reductions from capital dividends paid, capital gains exemptions claimed by non-arm's length persons)
Strategy 5: Paragraph 88(1)(d) Bump
- Alternative to subsection 164(6) planning without time limit
- Avoids double taxation for non-depreciable capital property by stepping up tax cost to FMV
- Only applies to non-depreciable capital property (land, shares, partnership interests), not land inventory
- Not generally useful for operating companies
- Dividends paid on shares post-death reduce step-up
Paragraph 88(1)(d) Bump Steps
- Incorporate Newco, transfer company shares to Newco for Newco shares (need 90% ownership for wind-up, 100% for amalgamation)
- Amalgamate or wind up Newco and operating company into Amalco
- ACB of underlying assets bumped to FMV
- Amalco only taxed on future increase in value
- Value payable tax-free to estate via pipeline
- Often combined with pipeline plan
Paragraph 88(1)(d) Bump Issues
- Type of assets owned (only non-depreciable capital property eligible)
- Timing of asset sale (if within first estate year, subsection 164(6) may be better)
- Different beneficiary needs
- Timing of amalgamation (deemed year-end immediately before creating short year possibility)
- Only applies to property in company at time of death (cannot increase cost of assets acquired post-death)
- Increased complications with multiple shareholders or trusts involved
- If shares transferred to spousal trust at cost, bump unavailable due to low cost base
Donation Planning
Special carryback rules and maximizing donation benefits
Donation Carryback Rules
- Donations made in GRE for 36 months and additional 2 years (60 months total) carriable back to previous estate years, year of death, and prior year
- Must be assets of deceased or substituted property (careful which assets donated)
- Trap: dividend received by estate not substituted property, carryback unavailable
- Share redemption produces deemed dividend creating substituted property, carryback available
Maximizing Donation Benefit
- Donation of public company stock eliminates capital gain
- Special rule on death: donation made by GRE considered made by deceased
- Strategy: donate stock with largest percentage gain eliminating capital gain at death
- If cash donated, gain arises at death in normal way
Alter Ego, Joint Spousal, and Spousal Trusts
Death of trust beneficiary and capital loss carryback planning
Trust Death Rules
- On death of beneficiary (second spouse or common-law partner in joint spousal trust), gain arises
- Trust has deemed year-end
- Planning via capital loss carryback available
- Capital losses realized in following three taxation years of trust carriable back to period ending on death
- Trust taxation years: death date to selected year-end, then annual years
- Loss carryback from following three years to death period
Post-Mortem Planning Case Studies
Working through real scenarios with complete analysis
Case 1: Active Business Not SBC
- Company carries on active business, not SBC, will continue post death with children taking over, beneficiaries Canadian resident
- Strategy: estate uses pipeline removing funds tax-free to beneficiaries over time
- Capital gain at death taxed at 26.5%
- If redemption/capital loss carryback, dividend taxed to estate or beneficiaries at 39%/47% (much more expensive)
Case 2: Investment Holding Company
- Company owns marketable securities with large gains, all beneficiaries Canadian resident
- Approach 1: liquidate company, sell securities producing deemed dividend and capital loss, pay portion as CDA with balance taxable dividend, capital loss carryback to deceased (must do in first GRE year), overall tax rate approximately 29%
- Approach 2: use step-up and pipeline, no gain in company due to step-up, no tax on withdrawal via pipeline, no capital loss carryback, overall tax approximately 26.5%, no need to complete in first GRE year
Case 3: SBC With Capital Gains Exemption Available
- Company is SBC value $800K, deceased may claim capital gains exemption, estate holds shares ACB $800K
- If capital gains exemption claimed, estate cannot extract funds via pipeline (section 84.1 creates deemed dividend)
- Estate and deceased non-arm's length for section 84.1, pipeline produces deemed dividend up to gross exemption claimed
- Two choices: claim exemption without using pipeline, or don't claim exemption using pipeline to extract funds over time
- Pipeline creates $800K deemed dividend possibly 47% tax exceeding capital gains exemption benefit
- Strategy requires complete analysis
Case 4: Rental Properties With Non-Resident Beneficiaries
- Company holds valuable rental properties, beneficiaries 50% Canadian resident 50% Bahamas resident (no tax in Bahamas, no treaty so 25% withholding on dividends)
- Rental properties held long term, not over 5 full-time employees creating SIB income and RDTOH
- Step-up limited to land not building, double taxation major issue
- Pipeline not effective for SIB income (no dividend so no dividend refund creating 50% corporate tax)
- Strategy: estate transfers shares to holding company, wind up or amalgamate for step-up on land, holding company incorporates subsidiary, transfer properties to subsidiary at FMV on buildings creating capital gain and recapture
- Result: step-up in building cost to FMV and UCC for recapture plus 50% of capital gain, creates CDA and RDTOH
- Pay capital dividend by share redemption to Canadian resident beneficiary (tax-free), pay taxable dividend by redemption to non-resident beneficiary (25% withholding but dividend refund)
- Create capital loss in first GRE year carryback to deceased
- Overall tax reduction: dividend refund at 38.33% exceeds withholding tax at 25%
Capital Loss Restrictions and GRE Requirements
Loss reduction formulas and graduated rate estate qualifications
Capital Loss Reduction Rule
- Capital loss carryback limited by loss denial rule
- Special rule for GRE (subsection 112(3.2)): 50% denial not 100%
- Loss on share redemption reduced by: lesser of capital dividends received by estate OR capital loss less taxable dividends received by estate, MINUS half of lesser of capital loss of estate OR capital gain of deceased
- Mechanical formula requiring calculation with actual numbers
Loss Reduction Examples
- Example 1: capital gain $2M, redemption produces capital dividend $1.2M and taxable dividend $800K, loss reduction lesser of $1.2M or $1.2M ($2M minus $800K) = $1.2M, minus half of $2M = $1M, reduction $200K, capital loss available $1.8M
- Example 2 (50% solution): same facts but redemption 100% capital dividend $2M from insurance, loss reduction lesser of $2M or $2M = $2M, minus half of $2M = $1M, reduction $1M, only $1M loss available (50% of capital loss allowed)
- Strategy decision: accept 50% loss reduction or pay taxable dividend for 50% keeping CDA for future payout
Loss Reduction Observations
- No capital dividend means no loss reduction
- Capital dividend equals taxable dividend means no loss reduction
- Taxable dividend exceeds capital dividend means no loss reduction
- Typical case loss reduction $200K on $2M (tax cost approximately $50K, not large)
- But taxable dividend $800K creates tax to estate or beneficiaries at 47% or 39% if eligible
- Strategy reduces tax but does not eliminate
- If corporation has RDTOH, taxable dividend triggers dividend refund making very helpful
- Overall evaluation requires considering ERDTOH, NERDTOH, GRIP, CDA, non-resident beneficiaries
TOSI Considerations
- Estate exempt from TOSI, no issue with graduated rates
- Beneficiaries may be subject to TOSI on dividends distributed
- Especially applies to taxable dividends from private corporations
Graduated Rate Estate Requirements
- Estate of individual creating testamentary trust
- Main estate only, not trusts created under will (spousal trust not GRE)
- Special tax treatment: capital loss carryback to terminal return, special donation rules, nil capital gain on deceased's stock donated, graduated tax rates for 36 months
- Adopting 12-month period produces 3 taxation years of graduated rates
- Different year-end produces 4 taxation years of graduated rates (example: death March 31, year-end March 28 creates 3-day fourth year with graduated rates ideal for realizing dividend or capital gain)
Disqualifying GRE
- If anyone other than deceased transfers property to estate, disqualifies GRE
- Does not apply to designations under plans or policies (estate beneficiary of RRSP or insurance not problem)
- Example: trust from years ago names estate as beneficiary on death disqualifies estate as testamentary trust
- Vital that GRE created without taint, planning done in GRE not other testamentary trusts
Meet Your Presenters
Michael Cadesky
Michael Cadesky is the managing partner at Cadesky Tax and a committed contributor to the tax and accounting professions since 1980, earning the title of Fellow from CPA Ontario. He is a past governor of the Canadian Tax Foundation, past chair of STEP Canada and STEP Worldwide, and past chair of the CPA Canada Tax Committee for Small and Medium-Sized Enterprises. Michael is also the co-author of 11 books on tax subjects and the author or co-author of numerous papers and articles on Canadian and international taxation.
Grace Chow
As a founding partner of Cadesky Tax, Grace brings more than 25 years of experience in Canadian and international tax, foreign investment into Canada, international acquisitions, tax treaties, Canada/U.S. tax, estate planning, transfer pricing, and tax disputes.
FAQ
When can I access the course?
Immediately upon purchase. All course materials are available on-demand, allowing you to start learning right away.
How long do I have access?
You have 1-year all-access to the course materials. Watch and review the content as many times as you need, at your own pace.
Does the course provide CPD?
Yes. Upon completion, you will receive a verifiable CPD certificate indicating all instructional learning hours and required details.
What's included in the course?
Full video recording of the seminar, plus slides with detailed notes for your reference. Additional resources may be included.
Can I watch on any device?
Yes. Access the course from your computer, tablet, or phone — any device with internet access.