Presentation Material - McCarthy Tétrault

Chris Falk
Stefanie Morand
McCarthy Tétrault LLP
PIPELINE PLANNING
Background – Post-Mortem Tax Planning
Various post-mortem tax planning techniques have been developed and refined over the years
to relieve against double taxation that can arise under the Act as a result of the deemed
disposition on death.
Where an individual dies owning shares of a private corporation, 9 the shares 10 are generally
deemed to be disposed of by the deceased immediately prior to death at their then FMV (in the
absence of a rollover to a spouse or spouse trust). 11 If the FMV of the shares exceeds their
adjusted cost base (“ACB”) 12 as is commonly the case, a capital gain will be realized in the
deceased’s terminal year.
As a consequence of the deemed disposition at FMV, where the shares of the private
corporation are acquired by a person (e.g., the deceased’s estate 13 ), that person is deemed to
have acquired the shares at a cost equal to the FMV immediately before death. However, the
deemed disposition does not vary the ACB of the assets owned by the corporation or permit
assets to be distributed from the corporation to its shareholders without additional shareholder
level tax. Accordingly, in the absence of tax planning, the same economic gain that was taxed
in the hands of the deceased may be taxed again in the hands of the corporation (and its
shareholders) when the corporation’s assets are ultimately disposed of (and the net proceeds
are distributed to shareholders).
The two principal techniques for relieving against this form of economic double taxation are:
• Capital loss carry-back planning, using the provisions of subsection 164(6) to create a
loss in the deceased’s estate within the estate’s first taxation year, which capital loss the
Act permits to be used to offset the capital gain arising on death; and
• “Pipeline planning”, in which a new corporation is used to create a so-called “pipeline” of
debt or high paid-up capital (“PUC”) shares that allows assets to be distributed to the
estate (or its beneficiaries) without additional tax payable by the recipient. 14
These techniques are sometimes used independently but are often combined with a view to
optimizing the after-tax result.
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These comments assume, as would normally be the case, that such shares were capital property of the
deceased taxpayer for purposes of the Act. Subsection 248(1) and section 54 define what constitutes a
taxpayer’s “capital property”.
As well as other properties owned by the deceased.
Subsection 70(5) provides for the deemed disposition of capital property at FMV; subsection 70(6) generally
provides for a rollover to a spouse or spouse trust. The rollovers in section 70 for family farming corporations
and family fishing corporations transferred to children of a deceased are ignored for purposes of this paper.
Subsection 248(1) and section 54.
More precisely, the deceased’s executor or executrix in his or her capacity as executor or executrix.
Pipeline planning is sometimes combined with “bump” planning. In concept, the corporation is wound-up into a
new corporation and the provisions of paragraphs 88(1)(c) and (d) are relied on to increase the ACB of the
corporation’s non-depreciable capital property. Alternatively, instead of a tax-deferred winding-up undertaken
pursuant to subsection 88(1), an amalgamation (e.g., a short-form vertical amalgamation) under section 87 could
be undertaken.
560600/422632
MT DOCS 11864055v1G
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