Private Company Shares Owned at Death: Tax in Canada

If you are the executor for someone who owned shares of a private company, the tax question often arrives before the business questions are settled. Canada does not charge a separate inheritance tax, but the final return can carry a large bill because of how death is treated for tax purposes.

This article explains the deemed sale of shares, why valuation matters, and the main tools that can reduce the tax. Every estate is different, so use this as a map for a conversation with a lawyer or accountant, not as a substitute for one.

This article covers Canadian federal tax law, which applies in every province.

The deemed sale on death

On death, a taxpayer is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value. The tax is carried on the final return, not by an inheritance tax.

The gain or loss is the fair market value on the date of death minus the adjusted cost base. It is reported on Schedule 3 and line 12700 of the final return, and it is reported by the deceased, not by the beneficiaries.

The person who receives the shares is treated as acquiring them at death at a cost equal to that fair market value. That becomes their own adjusted cost base for any later sale. Gains on property the estate itself sells after death are reported separately, on the estate's T3 return, not on the final return.

Why valuation matters so much

Fair market value is usually the highest dollar value you can get for property in an open and unrestricted market, and the CRA tells owners to keep records of the value on the date of death. For shares of a private company there is no market price to look up, so the number has to be built from the company's own facts.

The CRA's guidance on the final return does not set out what evidence must support a value. How private company shares are best valued depends on the business, its assets, its debts and any shareholder agreement, so a written valuation from a qualified professional is often worth considering. Keep that report with the estate records, because the value fixes both the deceased's gain and the heir's future cost base.

Tools that can reduce the tax

The deduction limit shown by the CRA is $1,250,000 for dispositions on or after June 25, 2024, and it is indexed to inflation. Because that figure has been described as a changed amount, confirm the current limit before relying on it.

Choosing the rollover or opting out

The spousal rollover is automatic where its conditions are met, but it is not always the best result. The legal representative may elect on the final return that the rollover not apply, property by property, so that proceeds are set at fair market value instead. That can be useful to use the deceased's losses, the capital gains deduction, or lower rates on the final return.

Where the rollover does not apply, for example because the spouse was not resident in Canada immediately before death, the ordinary deemed sale applies. Farm or fishing property passing to a child follows its own rule, which lets the legal representative choose a deemed amount within set limits. Whether any of these fits your estate depends on who receives the shares and how the will is written.

• Who is receiving the shares: a spouse, a spousal trust, a child or others?
• Does the company qualify for the capital gains deduction?
• Does the deceased have losses that could absorb a gain?
• Will the property vest in the spouse or trust within 36 months?

Deadlines, payment and the clearance certificate

For a death from January 1 to October 31, filing and payment are due April 30 of the following year; for a death from November 1 to December 31, the return is due 6 months after the date of death. If the deceased or a spouse or common-law partner living with them carried on a business on the date of death, the filing date is June 15 of the following year for deaths from January 1 to December 15, but the payment date does not change.

If the tax is large, the representative can delay payment only by giving the CRA acceptable security and completing Form T2075, and interest still accrues. Before distributing property, the representative must obtain a clearance certificate; without one, the representative is personally liable for the unpaid amounts up to the value of property distributed.

What to do next

• Locate the share certificates, shareholder agreements and the company's financial statements.
• Get a written valuation as at the date of death.
• Find the adjusted cost base of the shares from company records.
• Identify who receives the shares under the will.
• Ask a lawyer or accountant whether the rollover, an opt-out election or the capital gains deduction fits.
• Request the clearance certificate on Form TX19 once the notices of assessment arrive, before distributing.

Frequently asked questions