While the death of a taxpayer invariably causes stress for those they leave behind, proactive planning can at least help to minimize the tax burden. With that in mind, this article provides a brief overview of the tax consequences on death, outlines planning opportunities and strategies for simple and complex estates, and discusses certain proposals still in limbo. Note: This article only addresses the tax implications for individuals and not for life interest trusts.
Tax consequences on death
The death of a taxpayer (a decedent) is a taxable event under the Income Tax Act (the Act), and it can give rise to a number of tax issues. At the time of death, all of the decedent’s capital property, resource property, and land inventory is deemed to be disposed of for an amount equal to its fair market value (FMV) immediately before death.1 As a result, any accrued capital gains and losses, as well as all terminal losses and recapture on depreciable capital property up to the time of death, are realized on the decedent’s terminal return. Simultaneously, the decedent’s estate or, alternatively, the beneficiary who inherits the assets, is deemed to have acquired the decedent’s capital property at its FMV immediately before death.2
The deemed disposition and reacquisition on death often results in significant tax liability and creates a risk of double taxation, particularly for decedents who owned private corporation shares at the time of death. In such cases, when the deceased shareholder dies, the first level of tax is triggered by the deemed disposition of their private corporation shares. Such recognition on the accrued gain is based on the corporation’s shares as opposed to the underlying assets. Without any post-mortem planning, the estate or beneficiary will be subject to a second level of tax on the liquidation of corporation assets and on the distribution to shareholders.
Planning opportunities and strategies
The complexity of assets, family dynamics, and individual circumstances all contribute to the unique character of each estate. Here we will explore common planning strategies and opportunities applicable to both simple estates (primarily consisting of personal assets like real estate, investments, and personal belongings) and more complex estates involving private company shares.
Simple estates
Loss utilization:
Net capital losses can be applied against all sources of income in both the year of death and the immediately preceding year.3 This special rule allows for the deduction of such losses up to the amount of the taxpayer’s available income from all sources for these two years.
Spousal rollovers:
There is an automatic tax-deferred rollover on assets inherited by a surviving spouse or common-law partner. However, it is possible to elect out of the spousal rollover on a property-by-property basis.4 Opting out allows the surviving spouse to acquire the property at the stepped-up cost base equal to the FMV immediately before death, which can help reduce tax on capital gains in the event of a future sale.
In addition, a beneficiary may wish to elect out of the spousal rollover if the decedent had significant capital losses carried forward from previous years or if they had a low marginal tax rate in the year of death. Moreover, if the decedent owned qualifying small business corporation shares or qualified farm or fishing property, electing out of the spousal rollover would allow the decedent to take advantage of the lifetime capital gains exemption (LCGE) during their lifetime.
Charitable donations:
The amount of charitable donations that can be claimed as a tax credit is generally limited to 75% of an individual’s net income each year.5 However, this limit is increased to 100% of net income for donations made in either the year of death or the immediately preceding year. In addition, where the charitable donation is made within 60 months of the individual’s death and the estate meets the condition of a graduated rate estate (GRE)6 without considering the 36-month GRE limitation, the donation can also be allocated to the decedent’s return for the year before death, the year of death, and any preceding year of the estate.7
Medical expenses:
Eligible medical expenses paid within any 24-month period that includes the date of death can generally be claimed on the deceased individual’s final tax return.8 This extended claiming period allows for the deduction of expenses that were incurred closer to the time of death but that had not been fully claimed in prior years.
Complex estates
Capital loss carry-backs:
The capital loss carry-back strategy is commonly used to avoid double taxation on the wind-up of a private corporation or share redemption if either occurred in the first taxation year of the estate. Subsection 164(6) of the Act allows the executors of a GRE to carry back the capital loss realized within the estate’s first taxation year against the capital gains realized on the deemed disposition reported on the decedent’s terminal return. The loss carry-back generally offsets the capital gain reported on the terminal return and gives rise to a deemed dividend in the estate. The tax liability on the deemed dividend will then depend on the availability of tax pools, such as the capital dividend account9 and the general rate income pool.10
Pipeline planning:
Pipeline planning is another commonly used strategy to mitigate double taxation on death. The pipeline strategy involves the disposition of private company shares held by the estate to a newly incorporated holding company in exchange for a promissory note. Such disposition should not trigger any taxes since the adjusted cost base11 of the private company shares should equal the FMV on death (unless the company’s value has changed after death).
Section 84.1 of the Act is an anti-avoidance rule designed to prevent surplus stripping. Where the decedent has already claimed the LCGE on the shares, section 84.1 of the Act may apply to convert capital gains into a deemed dividend.
A similar provision in a cross-border context can be found under section 212.1 of the Act. When the GRE disposes of the private company shares to a holding company, each of the GRE’s non-resident beneficiaries is deemed to have disposed of their interest in the company. And as the result of the look-through rule,12 a non-resident beneficiary is deemed to have received a dividend equal to the promissory note received, less the paid-up capital,13 in a post-mortem pipeline transaction. Thankfully, a comfort letter issued by the Department of Finance on December 2, 2019, provides some comfort to exclude the application of paragraph 212.1(6)(b) of the Act for a non-resident beneficiary of a GRE.14
Bump and hybrid planning:
Depending on the circumstances, a combination of post-mortem planning strategies may be used to optimize the tax result and minimize the estate’s tax liability. Hybrid planning is most often seen when the private company is an operating company with pre-existing tax pool balances, such as the capital dividend account, general rate income pool, and eligible and non-eligible refundable dividend tax on hand.15
The bump strategy uses paragraph 88(1)(d) of the Act to “bump” the adjusted cost base of non-depreciable capital property owned by the subsidiary on a qualified wind-up or amalgamation into the parent company. The intricacy of paragraph 88(1)(d) planning is beyond the scope of this article.
Tax proposals in limbo
The prorogation of Parliament on January 6, 2025, left many proposed tax legislation changes up in the air, as any bills that hadn’t received royal assent by January 6 were terminated. To be passed, they will have to be reintroduced as new proposals after prorogation ends on March 24, 2025.16
Under the 2024 proposals, the capital gains inclusion rate was expected to increase from one-half to two-thirds for any capital gains triggered on or after June 25, 2024, that exceed $250,000 for individuals, GREs, and qualifying disability trusts. In addition, there was a proposal to increase the LCGE from $1,016,836 to $1,250,000 for dispositions of qualifying small business corporation shares or qualified farm or fishing property resulting from eligible capital gains that occurred on or after June 25, 2024. Another notable proposal was to extend the length of time for the carry-back of capital losses from a GRE to the decedent’s terminal return—increasing it from one year to three years. These changes were tabled in the Notice of Ways and Means Motion17 on September 23, 2024.
The Department of Finance announced on January 31, 2025, that the proposed change to the capital gains inclusion rate will be deferred until January 1, 2026, while the increase to the LCGE limit is still expected to take effect as was proposed (effective June 25, 2024).18 The government is also expected to introduce legislation effecting the increase in the capital gains inclusion rate and the increase in the LCGE limit in due course. Unfortunately, the January 31 announcement did not address other pending tax changes, such as the proposed extension to the capital loss carry-back period for GREs.
The next federal election will be later this year, and at the time of this writing in February, it’s uncertain if any of these proposed tax changes will ever come into force. Amid this uncertainty, executors will need to be especially cautious when choosing post-mortem planning strategies.
Mark Sherritt, CPA, CA, is a tax partner with Baker Tilly WM LLP in Vancouver, where he focuses primarily on planning, structuring, and transactions for Canadian owner-managed businesses.
Cathy Wong, CPA, CGA, is a senior tax manager with Baker Tilly WM LLP in Vancouver, where she focuses primarily on planning and compliance for individuals, trusts, and estates in a Canadian and US cross-border context.
This article was originally published in the March/April 2025 issue of CPABC in Focus.
Footnotes
1 Pursuant to subsections 70(5) and 70(5.2) of the Act, unless the taxpayer’s legal representative elects under subsection 70(6.2) of the Act for the automatic spousal rollover to not apply.
2 Pursuant to paragraph 70(5)(b) of the Act.
3 Pursuant to subsection 111(2) of the Act.
4 Under subsection 70(6.2) of the Act.
5 The limit of 75% is set out in the definition of “total gifts” in subsection 118.1(1) of the Act.
6 As defined in subsection 248(1) of the Act. The GRE is the estate that arises on and as a consequence of an individual’s death if certain conditions apply. The GRE status is limited to 36 months after the death and is only relevant to individuals who died after 2015.
7 Pursuant to subsection 118.1(5.1) of the Act and technical interpretation 2017-0684481E5.
8 Pursuant to subsection 118.2(1) of the Act.
9 As defined in subsection 89(1) of the Act.
10 Ibid.
11 As defined in section 54 of the Act.
12 Pursuant to paragraph 212.1(6)(b) of the Act.
13 As defined in subsection 89(1) of the Act.
14 Tax Interpretations, “3 December 2019 CTF Roundtable Q. 5, 2019-0824561C6 - 212.1 Post-mortem Pipeline Transaction,” taxinterpretations.com.
15 As defined in subsection 129(4) of the Act.
16 House of Commons, “8: The Parliamentary Cycle – Prorogation and Dissolution,” Procedure and Practice, Eds. Robert Marleau and Camille Montpetit, January 2000.
17 Department of Finance Canada, “Notice of Ways and Means Motion to Introduce a Bill Entitled An Act to Amend the Income Tax Act and the Income Tax Regulations and Explanatory Notes,” fin.canada.ca, September 23, 2024.
18 Department of Finance Canada, “Government of Canada Announces Deferral in Implementation of Change to Capital Gains Inclusion Rate,” fin.canada.ca, January 31, 2025.
