All About Estates

Pipeline planning and the dangers of subsection 84(2)

In 1789, Benjamin Franklin, one of the founding fathers of the United States Constitution, provided the world with this great quote, “nothing is certain except death and taxes”.

In 2021, John Oakey, the founding father of three Oakey children, is providing the world (or at least anyone reading this blog) with this great quote “nothing is certain with death and taxes”.

Minimizing tax exposure

The certainty of taxes upon death is undisputable, but the amount of tax is not as certain. Estate planners have various tax planning strategies that can be built into an estate plan to ensure sufficient flexibility to accommodate minimizing tax exposure that can arise upon a taxpayer’s death. One common strategy that can be implemented is called “pipeline planning”. This strategy is often used to avoid potential double tax exposure that can arise when the estate receives private company shares that were subject to a deemed disposition at fair market value under 70(5) of the Income Tax Act (ITA). This potential double taxation situation arises because the value of the private company could be taxed twice.

Pipeline planning

Tax is first paid on the private company’s inherent value through the capital gain that resulted from the deemed disposition of the company’s shares upon death. The estate then will pay tax on the private company’s inherent value on the extraction of the company’s equity through the declaration of dividends. The pipeline planning is a series of steps that utilizes the stepped-up cost base of the private company shares resulting from the capital gains realized on death allowing the estate to extract the private company’s equity tax-free without the need to declare taxable dividends.

The steps involved in this strategy are very straight-forward, but estate planners will need to be cautious of subsection 84(2) of the ITA being applied. If the conditions in subsection 84(2) are met, the extraction of the private company’s equity is converted from a tax-free distribution in the estate to a deemed taxable dividend – thus resulting in the private company’s equity being taxed twice – voila double taxation! The conditions that must be met for subsection 84(2) to apply are as follows:

  1. There is a Canadian-resident corporation,
  2. There is a winding-up, discontinuance or reorganization of the corporation’s business; and
  3. There is a distribution or appropriation of the corporation’s funds or other property in any manner whatever to or for the benefit of the holders of any class of shares of the corporation.

The wording in subsection 84(2) is broadly applicable, which makes avoiding its application tricky.  Thankfully, Canada Revenue Agency (CRA), has numerous rulings that provide some level of clarification on how CRA interprets these conditions related to post-mortem pipeline planning. These rulings are fact specific, but collectively they provide the following guidelines[1]:

  • For the second condition listed above not to apply, the private company should not be amalgamated or wound-up for a least one year after the time of death and the company should maintain the same mix and value of the assets that it had at the time of the taxpayer’s death, and
  • For the third condition listed above not to apply, assets should not be distributed to shareholders for at least one year, followed by progressive distribution of the assets over a period of time[2].

These rulings are very useful in providing guidance, but the rulings are only binding on the taxpayers that requested the rulings. Estate planners should also look to tax jurisprudence to ensure they understand how the Canadian tax court system interprets the conditions of subsection 84(2).

The third condition listed above requires that the benefit of the appropriation or distribution of the corporation’s funds or other property must be received by a shareholder.  In the Federal Court of Appeal decision in The Queen v. MacDonald[3], the judge concluded that the determination of when an individual is a shareholder for purposes of subsection 84(2) is at the time when the planning takes place and not at the time when the funds or property are actually received.

The second condition listed above requires the corporation’s business to be wound-up, discontinued or reorganized.  In Foix et al. v. The Queen[4], the judge concluded that the specific transactions undertaken to complete the sale of a corporate business to an arm’s length party met the condition of reorganizing the corporation’s business.


Post-mortem pipeline planning is an acceptable strategy to help with the uncertainty of taxes on death, but exercise caution to avoid the unwanted application of subsection 84(2).


[1] This is a summarization of the specific guidelines that have been developed over time through the numerous rulings related to post-mortem pipeline planning and the application of 84(2). It would be prudent to review the specific rulings to better understand the guidelines developed through CRA’s rulings directorate.

[2] In a 2019 ruling (2018-0789911R3), CRA changed its longstanding position related to the one-year distribution moratorium and stated that an estate could immediately receive sufficient funds from the corporation to pay income taxes resulting from the application of subsection 70(5) of the ITA.

[3] 2013 FCA 110

[4] 2021 CCI 52

About John Oakey
National Tax Director for Baker Tilly Canada. John has extensive experience with Canadian corporate and personal income taxes with specialization in the areas of corporate reorganizations, estate planning, succession planning and tax compliance. He also has significant experience dealing with GST/HST issues and U.S. citizen cross-border tax reporting issues.


Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.