Death & Income Taxes: Private Company Shares on Death

This blog focuses on post-mortem planning strategies where an individual dies owning private company shares. As these assets can trigger significant tax liabilities and liquidity challenges, advance planning is essential to protect the estate and ease the transition for heirs.

Tax Impact on Death

When a Canadian-resident individual dies, they will pay income taxes as if all assets were sold or liquidated that day (deemed disposition at fair market value), except for assets transferred to a spouse¹ or spousal trust.

• Accrued gains on capital assets are 50% taxable
• RRSP or RRIF values are fully taxable

The same tax treatment applies to life interest trusts (LIT) – most commonly alter ego trusts (AETs) and joint partner or spousal trusts (JPTs) – when the settlor (of an AET) or the surviving spouse (of a JPT) dies.

Cashflow Impact

This deemed disposition tax may not be concerning when an individual or LIT owns assets with little or no accrued gains (e.g. GICs, chequing accounts) or assets that are sheltered from tax (e.g. principal residence).

Publicly traded securities, even with considerable accrued gains, can usually be sold quickly to fund taxes.  

A significant concern arises when the deceased owns illiquid assets such as rental properties or private company shares. These often have significant accrued gains but cannot be sold quickly, leaving the estate without the cash to pay taxes if there are insufficient funds from other sources or life insurance coverage.

This can cause undue financial hardships and emotional stress for executors or trustees.

Private Company Shares on Death

Multiple layers of tax can apply to the same underlying value when a person owns private company shares on death, unless the shares are later sold to an arm’s length party. 

1. At death: the Estate/LIT pays tax on capital gains based on the share value.
2. On distribution from the company (e.g. liquidation, dividends): the shareholder (Estate/LIT/beneficiary) pays tax at dividend rates.
3. On sale of company assets: the company pays tax on capital gains and where applicable, recapture of capital cost allowance previously deducted.

Example

Lily, a widow, dies owning all the shares of PotterCo having a fair market value (FMV) of $1 million, and adjusted cost base (ACB) and paid-up capital (PUC) of $nil. She leaves the shares to her adult son, Harry.

• At death, Lily realizes a $1 million capital gain ($1m FMV, less $nil ACB), half of which is taxable.
• The shares’ ACB is “bumped” to $1 million. If the shares are later sold to an arm’s length party, no tax will be payable on the first $1 million due to the ACB.

Four years later, the FMV of the shares has not changed and Harry winds up the company.

• The $1 million cash he receives is taxed as a dividend since PUC was not “bumped” ($1m FMV, less $nil PUC).

Using top 2025 tax rates, the combined tax burden on the same $1 million value is 75.64% (26.75% on capital gains and 48.89% on dividends assuming they are non-eligible).

Post-Mortem Planning Strategies

Two primary strategies can reduce the multiple layers of tax that arise on death.

1. Windup & Loss Carryback

This method is simpler but must be completed within the first three taxation years of death².

PotterCo is liquidated and wound up within this time period.

• The $1m distribution creates a deemed dividend of $1 million ($1m FMV, less $nil PUC) and a capital loss of $1 million ($1m FMV, less $1m deemed dividend and $1m ACB).

Where there are insufficient capital gains in the current year, the capital loss can be used to reduce capital gains realized in the three previous, or any future, taxation years. A special rule³ allows a Graduated Rate Estate⁴ to apply the capital loss (in the estate tax return) against the capital gain realized on death (in the final personal tax return). An AET or JPT simply applies the loss to its own gains in other years.

This plan eliminates the capital gains layer of tax. Using the same facts, the combined tax drops to 48.89%.

2.Pipeline Restructuring Plan 

This plan is more complex and costly – but more flexible and tax-efficient – than the Windup & Loss Carryback plan.

A Pipeline Plan generally involves:

• Creating a new company,
• Reorganizing the share structure of PotterCo, and
• Maintaining PotterCo’s business activities for a minimum period (typically one year) and thereafter, limiting the timing and amounts of distributions over a sufficient period of time.

This strategy brings the combined tax cost down to 26.75%, saving 48.89% relative to no planning or 22.14% relative to the Windup & Loss Carryback plan.

“Bump planning” may also be available, allowing the ACB of PotterCo’s non-depreciable capital assets to be increased up to the value at death, further improving tax efficiency (not illustrated here) on future sale of corporate assets. Specific planning must be considered prior to death so that the “bump”  will be available to a company whose value is held by an AET or JPT.

A favourable Advanced Tax Ruling (Ruling) from the Canada Revenue Agency (CRA) provides certainty, but it also involves additional time and financial costs and requires strict implementation. Without a Ruling, a Pipeline should be planned as closely as possible to publicly available Rulings, though this can be challenging when key information is redacted for privacy purposes. Otherwise, anti-avoidance provisions⁵ could reinstate the double taxation that the plan intended to eliminate. 

Pipeline planning offers substantial tax benefits but comes with added administrative and compliance obligations and complexities, significant professional fees, and delays in accessing funds. For unsophisticated or inexperienced executors or trustees, this plan may be difficult to understand, navigate, and comply with. 

Other Post-Mortem Considerations

Several other matters that were not considered above, but bear a brief mention, include:

Probate Fees

Probate fees apply to the value (rather than the accrued gains) of estate assets requiring a grant of probate. AETs and JPTs avoid probate as assets are owned by the trust (see Impact of Income Taxes & Probate Fees on Your Estate ).

Charitable Donations

Charitable gift planning can meaningfully reduce income taxes on death, however the different rules relating to charitable donations have not been addressed here.

Final Thoughts

High net-worth individuals should consider post-mortem planning for private company shares during their lifetime. Proper planning ensures the estate can fund taxes, minimizes erosion of wealth, and allows for a smoother transfer to the next generation.

¹All references to a spouse herein will include a common-law partner.

² Bill C-15 received Royal Assent on March 26, 2026, extending the Graduated Rate Estate window from one taxation year to three taxation years for deaths on or after August 11, 2024.

³ Subsection 164(6) of the Income Tax Act (ITA).

⁴ A Graduated Rate Estate is generally an estate where a person died not more than 36 months ago and other specific criteria are met (such as not having a contributor other than the deceased, not having received a loan from a beneficiary or non-arm’s length person unless certain exceptions are met, and certain information is included, or designation criteria is met in the trust income tax return).

⁵ Subsection 84(2) of the ITA.