The (Tax) Return of the Dead
- Reach CPA
- 17 minutes ago
- 4 min read
🎃 A Horror Story for Business Owners
When death comes knocking, most people worry about wills, ghosts, and the afterlife. But for business owners, there’s another kind of haunting — the ghost of double taxation.
In this Halloween special, we’ll unearth the creepy truth about what happens to your private corporation when you pass away. Prepare yourself — this is a tale of phantom taxes, disappearing wealth, and how to break the curse before it’s too late.
☠ The "Deemed Disposition"— When the CRA Awakens
In the world of Canadian tax law, death doesn’t mean your taxes die with you. Instead, the Canada Revenue Agency (CRA) casts a spell known as the “deemed disposition.”
It works like this:
When you die, the tax rules pretend you sold all your assets — including the shares of your private corporation — right before your final breath. This “pretend sale” happens at the fair market value (FMV) of your shares, even though nothing actually changed hands.
If those shares have gone up in value, that gain is reported on your final tax return (a.k.a. your terminal return). The result? A capital gains tax rises from the grave.
🧟♂️ How Double Taxation Haunts Your Estate
Here’s where things get truly scary. The same value in your company can be taxed twice — once on death and again when your heirs try to collect the cash.
First attack: On death, your shares are deemed sold. The capital gain is taxed on your terminal return.
Second attack: Later, when your estate withdraws the company’s assets (usually as dividends), those withdrawals get taxed again — this time as income.
The ghost of your wealth is taxed not once, but twice. A true tax horror story.
👻 A Simple Example (The $1,000,000 Curse)
Let’s summon a simple case from the underworld of accounting:
The deceased owned 100% of a private corporation.
The only asset in the company is a savings account with $1,000,000.
The cost of the shares (Adjusted Cost Base) was $0.
At death, the FMV of the shares is $1,000,000.
Step 1: Deemed Disposition at Death
Capital gain = $1,000,000 – $0 = $1,000,000
Taxable gain (50%) = $500,000
Assuming a 50% tax rate on capital gains → $250,000 tax owed
So, before your soul even leaves the body, the government takes $250,000.
Step 2: The Second Bite (When the Estate Withdraws the Cash)
When your heirs pull that $1,000,000 from the corporation as a dividend, the estate could face tax again — as high as 47% in some provinces.
That’s the same money being drained twice. The horror!
🧙♀️ Two Ways to Break the Curse
Luckily, there are ways to banish the double-tax demon. Two of the most common are the Pipeline and the Loss Carryback strategies.
1. The Pipeline — A Tax Exorcism
Think of the Pipeline Plan as a secret tunnel for your estate.
The estate transfers your shares to a new corporation in exchange for a promissory note (for $1,000,000).
The new corporation then winds up the old one and collects its cash.
Finally, it repays the note to the estate — tax-free.
💀 Result: Only the first capital gains tax ($250,000) is paid. The second layer of dividend tax is exorcised.
2. The Loss Carryback — Turning Pain into Power
If your estate winds up the corporation within its first tax year, a capital loss can be created (since the shares become worthless). This loss can then be carried back to the deceased’s final return to offset the capital gain.
Here’s how the magic works:
The estate receives a dividend on wind-up (taxable).
The capital loss on the shares offsets the gain at death.
💀 Result: The capital gains tax disappears, but the estate still pays dividend tax — possibly up to $470,000, depending on the province.
🕯️ Side-by-Side: The Tale of Two Outcomes
STRATEGY | TAXES PAID | OUTCOMES |
PIPELINE | ~$250,000 (capital gains tax only) | Heirs receive $1,000,000 tax-free |
LOSS CARRYBACK | ~$470,000 (dividend tax only) | Capital gains tax eliminated |
⚰️ The Moral of the Story
Even in death, taxes live on. Without planning, your private corporation could become a haunted house of double taxation — where your heirs lose nearly half of what you’ve built.
But with careful planning — the right pipeline or carryback strategy — you can lay that ghost to rest.
So this Halloween, as you carve pumpkins and watch horror flicks, take a moment to think about your own financial afterlife.
Because when it comes to taxes on death…it’s not just your soul that can get trapped between worlds. 👻
🕸️ Don’t Face the Tax Ghost Alone
Every business owner’s story is different — and so is every tax plan. Before the CRA comes knocking from beyond the grave, talk to your accountant or tax advisor about how to keep your wealth from becoming a ghost of itself.
They can help you choose the right strategy and make sure your legacy — not your taxes — lives on. 💼🕯️
Curious how to work balance into your firm without denting profits? Let’s talk, please reach out today!
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