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CRA issues favourable ruling on post-mortem pipelines

The Canada Revenue Agency (CRA) has been asked on numerous occasions to weigh in on whether specific post-mortem planning implemented by taxpayers to avoid double taxation would result in a deemed dividend. In a recent ruling, the CRA concluded that it would not apply either specific tax rules or the General Anti Avoidance Rule (GAAR) to the proposed transactions.

When an individual dies holding shares of a private corporation with high underlying value (usually in portfolio investments) and low cost basis, the individual is deemed to dispose of the shares, resulting in tax payable often at the top marginal tax rate. When the corporation subsequently sells the assets, it can result is a second layer of tax in the corporation on the same value that was already taxed to the individual at death. Furthermore, there is another layer of tax at the individual level when the corporation distributes the funds as dividends.

Post-mortem pipelines aim to avoid the double taxation that would otherwise occur if no planning is undertaken. In a basic post-mortem pipeline, the deceased individual is taxed on the deemed disposition at death and going forward the estate owns the shares of the corporation. The following steps are then completed:

  1. The estate incorporates a Newco and transfers the shares of the corporation to Newcoin exchange for a note on a tax deferred basis.
  2. Newco and the original corporation are then amalgamated, meaning that the amalgamated corporation owes the amount on the note to the estate.
  3. The amalgamated corporation pays the note over time to avoid the application of subsection 84(2). Subsection 84(2) would generally apply where there is a winding-up discontinuing or reorganizing of the corporation and there is a distribution or appropriation of the corporations funds by the shareholders.

The facts in the recent ruling are similar to the example above, however prior to completing basic pipeline steps, the taxpayer proposed additional steps akin to a ‘hybrid pipeline’ and asked CRA to opine on whether the plan will result, at any point, in the application of any specific tax rules or the GAAR. The proposed additional steps are as follows:

  1. Prior to the estate transferring the shares to newco, a portion of the marketable securities will be disposed of at a gain to generate capital dividend account (CDA).
  2. The paid up capital of the shares will be increased to the CDA amount, which in this case will result in a deemed dividend.
  3. The deemed dividend will be designated as a tax-free CDA dividend. The corporation will redeem the preferred shares owned by the estate in exchange for a promissory note which will result in a deemed dividend that will be designated as an eligible dividend to utilize available GRIP.
  4. On this disposition, the estate will recognize a capital loss, which it will carry back to the deceased’s terminal return to offset the gain on the deemed disposition that occurred at death.
  5. The traditional pipeline steps will then be completed and newco will repay the pipeline loan over the 12 months following amalgamation at a rate of 25% per quarter, while otherwise continuing the business as it was operated prior to the death of the original shareholder.

Some practitioners would consider this rate of distribution and wind-up to be risky. In previous rulings we have seen rates of 10% – 15% which did not draw negative attention from the CRA, however it is clear that they continue to approach these on a case-by case basis. As noted above, the CRA indicated it would not attempt to apply either a specific tax rule or GAAR to change to tax consequences in this case.

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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