Double Taxation On Death – Is The Pipeline An Answer?

Double taxation is a problem which can arise when an individual dies owning shares of a private corporation. The Income Tax Act (Canada) (the "ITA") legislates a deemed disposition of the shares at fair market value immediately before death. In certain circumstances, the pipeline strategy may be a good solution to limit the double taxation problem. The details of the pipeline strategy are further discussed in this article.

The double taxation problem

As a refresher, double taxation arises when two tax events occur:

Tax Event #1

Tax Event #1 occurs because of the deemed disposition immediately before death. Assuming that the shares of "Priv Co" (a fictional private corporation for the purposes of this example) held by the deceased have increased in value from date of acquisition to date of death, the deceased will generally be deemed to realize a capital gain. It does not matter if Priv Co is an investment holding corporation or an operating business.