Presentation Material - McCarthy Tétrault

Chris Falk
Stefanie Morand
McCarthy Tétrault LLP
How and When Capital Loss Carry-Back Planning and Pipeline Planning are Used
As noted above, capital loss carry-back planning typically involves the winding-up of the
corporation owned by the estate and/or a redemption of all or some portion of the estate’s
shares therein, within the first taxation year of the estate. In effect, pursuant to the provisions of
subsection 164(6), the capital gain realized on the deceased’s death can be offset wholly or in
part by a capital loss triggered in the estate’s first taxation year on the winding-up or
redemption. The winding-up or redemption will generally trigger corporate level tax on the
disposition of assets and deemed dividends to the shareholders; however, where such
dividends can be paid on a tax-efficient basis (e.g., paying capital dividends out of the
corporation’s capital dividend account or paying dividends that give rise to a dividend refund to
the corporation), capital loss carry-back planning is frequently beneficial.
If dividends cannot be paid on a tax-efficient basis, a pipeline strategy may be more effective,
particularly if the corporation in question has cash or other assets with nominal gains. 15
Pipelines may be particularly attractive in Ontario where there is a very substantial difference
between the highest marginal rate applicable to an individual on capital gains (i.e., 23.99%,
given the 50% inclusion rate on capital gains and the top marginal rate of 47.97%) and on
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dividends that are not eligible dividends (i.e., 34.52%).
In concept, pipeline planning preserves the capital gain on death while permitting assets of the
corporation to be effectively distributed to the ultimate shareholder without adverse tax
consequences to the shareholder. The planning may be illustrated by way of a simple
example: 18
• Mr. X dies owning all of the shares of a private corporation, XCo.
• The shares of XCo were held by Mr. X as capital property for purposes of the Act and
had an ACB to Mr. X of $100,000 and an FMV immediately prior to Mr. X’s death of
$1,000,000. Accordingly, the deemed disposition of the XCo shares would give rise to a
$900,000 capital gain in Mr. X’s terminal year (assuming no rollover to Mr. X’s spouse or
to a spouse trust).
• To create a “pipeline”, Mr. X’s estate would incorporate a new corporation, Newco, for
nominal consideration. The estate would sell the shares of XCo to Newco for
$1,000,000 (assuming no accrued gain or loss in the estate since Mr. X’s death). 19 The
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Pipeline planning may also be more effective where a “bump” can be used to increase the ACB of nondepreciable
capital assets. See note 14, above.
The highest marginal rate on eligible dividends is 31.69% in Ontario for 2012. These rates include the 2% surtax
on income above $500,000. Prior to the introduction of the 2% surtax, the highest marginal rates in Ontario were
46.41% on interest and regular income, 23.21% on capital gains (given the 50% inclusion rate), 29.54% on
eligible dividends and 32.57% on non-eligible dividends. These rates continue to apply for income over
$132,406 up to $500,000.
Private corporations that are or were formerly carrying on business and that have significant retained earnings
(that did not give rise to capital dividends or to refundable tax) are often corporations in respect of which pipeline
planning can be attractive.
In this example, XCo and Newco are assumed to be taxable Canadian corporations as defined in subsections
248(1) and 89(1).
A section 85 rollover could, of course, be used if there were an accrued gain in the hands of the estate.
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