Tax Tips



Post Mortem Pipeline Transactions
Subject: Pipeline Transactions
Number: 12-11
Date: 5/11/2012
Post Mortem Pipeline Transactions

As discussed in Tax Tip 1-13, post-mortem tax planning is important for a deceased shareholder who held shares of a private Canadian corporation at the time of  death.  The motivation for such planning is to mitigate against the possibility of double taxation. The first level of taxation arising from the deceased taxpayer’s deemed disposition of the private corporation shares at the time of death at fair market value (“FMV”) and the second for the heirs of the deceased when they remove assets from the corporation (the removal of the corporate property will generally be taxed as a dividend to the new shareholders with no decline in the taxation of such dividends as a result of the death of the original shareholder).  This Tax-Tip will not address the tax implications of the distribution to the heir(s).

There are two main strategies that are utilized to reduce the ultimate double tax exposure for shareholders of private corporations that may be realized upon death.  The first strategy is the so-called subsection 164(6) loss carryback and relies on the fact that the Estate of the deceased holds high adjusted cost base (“ACB”) shares as a result of the deceased being deemed to have disposed of his or her shares at FMV immediately prior to death.  The Estate then automatically acquires such shares at that FMV.  Very generally, the plan involves the creation of a loss by transferring the high ACB shares held by the Estate back to the corporation for FMV consideration paid to the Estate and utilizing the resulting loss to carryback to the terminal return of the deceased.  Such a transaction needs to be completed on a timely basis (normally within the first taxation year from the date of the death of the deceased).  The ultimate result of a subsection 164(6) loss carryback plan is that the deceased will no longer have a terminal capital gain but the Estate will be taxed on a dividend as a result of removing the corporate assets.  Double tax is eliminated but the tax to the estate of the deemed dividend may be higher than the tax saved on the deceased’s terminal tax return.

A second strategy, the “pipeline” transaction, avoids the payment of tax on a deemed dividend to the estate but leaves the capital gain on the deceased’s terminal tax return, resulting in avoiding paying the higher rate of tax that would apply to a dividend to the estate.  Under the Pipeline strategy, the ACB of the shares that are held by the Estate are instead transferred to a new corporation so that ultimately assets (surplus) can be removed from the corporation.  A typical “pipeline” transaction will look like the following:

  1. On death, the shares of “Opco” held by the deceased have been deemed to be disposed at their FMV immediately before death (say $1M).  The Estate will now hold the shares with $1M of ACB.
  2. These high ACB shares held by the Estate are transferred to a new corporation - “Newco” - (owned by the Estate) for consideration of a promissory note in the amount of $1M.
  3. Opco will repurchase its shares that are held by Newco.  This will result in a deemed dividend that will be received by Newco without tax consequences in most cases.
  4. Newco will then repay the promissory note to the Estate.

The above is an oversimplified version of a “pipeline” transaction but the result is that the deceased will be taxed on his or her terminal gain (at capital gains rates which are generally favorable to dividend rates) and the Estate receives the corporate assets (i.e., cash or assets with no accrued gain) without tax.  A thorough review of the technical provisions of the Act needs to be completed before implementing a “pipeline” transaction to ensure that the plan will achieve the ultimate objective...to avoid double tax to the estate.  In addition, if there are US beneficiaries of the Estate the cross-border tax implications need to be carefully thought through.

One of the anti-avoidance rules that has lately caught the attention of the CRA regarding “pipeline” transactions has been subsection 84(2) of the Act.  If applicable, it will cause the Estate to be taxed on a dividend when the loan to the Newco arising from the Pipeline transaction is repaid.  The CRA has recently stated that the removal of the corporate assets to the Estate can, in many cases, cause the conditions of subsection 84(2) to apply. 

However, The Tax Court of Canada, in a case released on April 17, 2012 – Dr. Robert G. MacDonald v. Her Majesty the Queen involved a surplus stripping transaction very similar to the pipeline strategy noted above. The CRA argued that subsection 84(2) would apply to a “pipeline” transaction that had been undertaken by Dr. MacDonald. In a very well reasoned decision, the Tax Court found that subsection 84(2) did not apply to a "pipeline" transaction.

The case is a welcome breath of fresh air as it disagrees with the CRA’s recent comments on post-mortem pipelines.  Great news.


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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.