Private Company Shares at Death: Tax on the Final Return in Canada

If you are the executor for a business owner, the shares of the private company may be the most valuable and the most complicated asset in the estate. The tax that arises at death can be significant.

This article explains in general terms how those shares are treated on the final return and what options may exist. Each estate is different, so the details are worth confirming with a lawyer and accountant.

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

Shares are treated as sold at 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 CRA says the gain or loss is the fair market value on the date of death minus the adjusted cost base, reported on Schedule 3 and line 12700 of the final return.

The gain is reported by the deceased on the final return, not by the beneficiaries. The person who acquires the shares because of the death is deemed to acquire them at fair market value immediately before death.

How the shares are valued

The CRA defines fair market value as usually the highest dollar value you can get for property in an open and unrestricted market. The CRA also tells owners to keep records of the value of property on the date they inherit it.

Private shares have no public market price, so valuation is often the hardest step. How the value is supported, and what evidence is best, depends on the business and the facts. Executors commonly ask an accountant or valuator for advice, and the value you report may be reviewed, so keep the supporting work.

Options that may reduce or defer the tax

• Lifetime capital gains deduction: gains on qualified small business corporation shares may be eligible, and the deduction is claimed on line 25400 using Form T657. How this applies depends on your situation, so confirm the current limit and whether the shares qualify with an accountant.
• Spouse or common-law partner rollover: shares transferred as a consequence of death to a spouse or common-law partner resident in Canada are treated as disposed of at the adjusted cost base, and the spouse takes the same amount. A qualifying spouse trust created by the will can also qualify.
• Vesting condition: the rollover applies only if the property vests indefeasibly in the spouse or trust within 36 months after death, or a longer period the Minister allows on written application.
• Opting out: the legal representative may elect, property by property, that the rollover not apply. This can help use the deceased's losses, the capital gains deduction or lower rates on the final return.
• Non-resident spouse: the rollover does not apply, and the ordinary rule applies.

Losses and estate planning points

In the year of death, net capital losses on the final return and the prior year's return can offset income other than capital gains, which is not normally allowed in other years. Unused net capital losses for other years not otherwise claimed may also be deducted in the year of death.

If a graduated rate estate disposes of capital property in one of its first three taxation years and its capital losses exceed its gains, the legal representative may elect to treat part of the excess as the deceased's loss on the final return. The election is made by the estate's filing due date for that year, and the final return must be amended.

If the estate sells shares after death, gains on that sale are reported on the estate's T3 return. Optional returns may also reduce tax in some cases, but they are not required.

Deadlines, payment and the clearance certificate

If the deceased, or the spouse or common-law partner living with them, carried on a business on the date of death, the filing due date is June 15 of the following year for deaths from January 1 to December 15. The payment due date does not change for business income. For deaths on other dates, other deadlines apply.

To delay payment of tax on the final return, the representative must give the CRA acceptable security and complete Form T2075, and interest still accrues. Late filing with a balance owing carries a penalty, and unpaid balances bear compound daily interest.

Before distributing property, a legal representative must obtain a clearance certificate. Without it, the representative is personally liable to the extent of the value of property distributed. The request is made on Form TX19, which should not be filed until the notices of assessment are received, unless an exception applies.

What to do next

• Collect the corporate records, share certificates and shareholder agreements.
• Find the adjusted cost base of the shares.
• Arrange a valuation as of the date of death and keep the supporting work.
• Check whether the shares might qualify for the capital gains deduction.
• Confirm who is receiving the shares and whether a rollover or an opt-out is suitable.
• Plan for payment of the tax and obtain the clearance certificate before distributing.

Because of the valuation and election decisions involved, it is worth working with a lawyer and accountant before the final return is filed.

Frequently asked questions