All About Estates

Post Mortem Pipeline Planning – Good Things Come to Those Who Wait

The Canada Revenue Agency (CRA) recently ruled on a post-mortem “pipeline” transaction involving a private corporation whereby the children of the last-to-die parent (B) received shares of a private corporation where the deceased had reported a deemed disposition gain on their final income tax return.

A pipeline transaction is a form of transaction whereby the assets of a corporation are distributed to shareholders utilizing the high adjusted cost base resulting from the capital gains realized on death, rather than as a distribution in the form of a dividend. In this sense, the use of a pipeline is often justified as avoiding “double-tax” in the sense that there has been tax imposed as a capital gain on the death of the shareholder followed by further tax in the form of a dividend realized when the assets are distributed. Both of these taxes would be shareholder-level taxes on ultimately the same assets (additional corporate-level tax may apply if the assets of the corporation have accrued but unrealized capital gains).

The steps in the proposed plan see the children incorporate a new corporation, Newco. Next the children will transfer the shares in the corporation received on B’s death to Newco in exchange for a promissory note having a principal amount equal to such child’s adjusted cost base of such shares (being the fair market value of the shares at B’s death) and shares of Newco. Following a period of at least one year, Newco and the corporation will amalgamate and the promissory notes will be repaid.

In implementing a pipeline, the general concern is that the repayment of the promissory note is considered a dividend equal to the amount or value of the funds or property distributed, minus (b) the reduction in the paid-up capital in respect of the shares of that class. As a result of this concern, it is commonplace for a pipeline ruling to provide the one-year “cooling off” period prior to a distribution of the corporation’s assets.

The CRA has issued favourable rulings where there is a one-year cooling off period that starts with repayment of the promissory note(s) – good things do come to those who wait.

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: