All About Estates

Pipelines and non-resident beneficiaries

Without proper tax planning, private company shareholders face the prospect of a double tax on the value of shares – once at the time of death and again when the successor beneficiaries extract the share value from the company.  Post mortem “pipeline” planning solves this problem by allowing the estate to extract the share value without additional tax paid in the deceased shareholder’s final return, that is, before a recently implemented change in the tax rules.

If the beneficiaries of the estate include a non-resident, a new tax rule may cause the distribution to the non-resident beneficiary to be treated as a dividend thus subject to Canadian withholding tax.  The rule as enacted applies to transactions occurring after February 26, 2018.

This unfortunate result may be an unintended result as pipeline planning was not referred to in either the 2018 Federal Budget (where the change was proposed) or the explanatory notes.  Taxpayers (including the estate) affected by this rule change which became law in December 2018 may be liable for penalty and interest on late withholding tax remittances and related tax filings.  The fix to deal with an unintended result may be to either specifically exclude pipeline planning or change the effective date of the new rules coming in to play.

Stay tuned to this channel as the matter discussed will evolve over time.  Thanks for reading.

 

About Derek de Gannes
Derek A. de Gannes: Senior Director, Business Tax 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: derek.degannes@rsmcanada.com

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