All About Estates

55(2) and Pipeline Planning

The Canada Revenue Agency (CRA) was asked to comment on the application of subsection 55(2) of the Income Tax Act to a hypothetical pipeline plan implemented on or after the date of death.  Their answer was both comforting and not surprising.

When engaged, subsection 55(2) has the effect of converting a tax-free dividend received by a private company to proceeds of disposition for capital gain purposes – in other words, there is the potential for tax.  Notwithstanding current draft legislation, a pipeline plan may allow for the post-mortem tax-free removal of assets from a private company.  One variation of the pipeline plan involves a number of steps including the formation of a new holding company (Newco), the transfer of the deceased’s private company shares to Newco for either full basis shares or a promissory note, and a redemption of the private company shares and repayment of the promissory note held by the estate.

Let’s say the adjusted cost base of the private company shares and the fair market value of those shares was the same at the time of transfer, there would be no capital gain if these shares had been sold in an arm’s length transaction.  In their view, the CRA confirmed subsection 55(2) would have no application.

It’s comforting from time to time when a logical result is confirmed.

About Derek de Gannes
Derek A. de Gannes: Senior Director, Private Client Services of RSM Canada. RSM Canada is committed to the highest level of integrity, quality and professionalism and provides clients with solutions in the area of Audit, Tax and Transaction Services. Email:


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