Post-mortem pipeline transactions can be a useful estate planning tool


Benjamin Franklin said, “nothing can be said to be certain, except death and taxes.” Indeed, even dying results in tax consequences and obligations. For instance, if a shareholder of a private corporation dies, there may be double taxation if the deceased person’s assets are not appropriately managed. One commonly used tax plan to address this double tax is a pipeline transaction. Recently, the Canada Revenue Agency ("CRA") in its ruling 2019-0793281R3 F affirmed that pipeline transactions continue to be valid estate planning tools to help taxpayers navigate taxation at death.

Deemed capital disposition at death and double taxation

Under the Income Tax Act ("ITA"), a deemed disposition of a taxpayer’s capital property (e.g. rental properties, stocks, etc.) occurs at fair market value ("FMV") immediately prior to the taxpayer’s death. The deceased’s estate is deemed to acquire the capital property at FMV.

Generally, the deceased person’s estate would then liquidate the property for distribution to the heirs without any further incidence of tax to the estate because following the deemed disposition on the taxpayer’s death, the assets should have cost basis equal to FMV. Assets such as rental property and public company stock can be easily liquidated in this manner. Other property however, like private company stock, are harder to convert into cash because it may be difficult to find buyers. In those cases, it is more convenient if the private company sells its assets and distributes the funds from the sale as a dividend back to the estate, for eventual distribution to the heirs.

The problem with this two-step approach of (i) liquidating a company’s capital assets and (ii) distributing the cash proceeds as a dividend, is that double taxation may occur. First, there is a layer of tax to the deceased on any gains realized from the deemed disposition upon the taxpayer’s death. A second layer of tax would then also apply when the estate receives sale proceeds as a dividend from the company. There could also be an acceleration of tax if the company must dispose of assets with accrued gains. One possibility for avoiding this double taxation is a pipeline transaction.

Pipeline transactions

A typical pipeline transaction could look like this:

  1. After the taxpayer’s death and deemed disposition of assets at FMV (say $1 million), the estate incorporates a new corporation Newco.
  2. The estate transfers the shares of the private corporation to Newco in consideration for a promissory note in an amount equal to the FMV of the shares transferred ($1 million). Because the promissory note of $1 million issued to the estate by Newco does not exceed the $1 million adjusted cost base of the shares at that time (i.e. assuming the FMV of the shares at the time of the pipeline transaction does not exceed their FMV at the time of the taxpayer’s death), there should be no tax consequences.
  3. Newco and the private company amalgamate or the private company is wound up into Newco on a tax-deferred basis. These transactions should generally not result in any adverse tax consequences.
  4. Distributions by Newco can be made to the estate as tax-free repayments of the promissory note. The repayment of the promissory note is the "pipeline" to remove $1 million of assets from the company, thereby avoiding the need to pay dividends to the estate and the accompanying double tax.

Provided certain recommendations established by the CRA are satisfied (specifically that (i) the corporations remain separate entities for at least one year; (ii) the first corporation continues to carry on its business during that time; and (iii) the first corporation's assets will not be distributed for at least one year), with a pipeline transaction, a private corporation’s assets can thus be liquidated or distributed to the estate without a second layer of dividend tax.

Recent CRA ruling on the use of pipeline transactions

Recently the CRA was asked to rule in 2019-0793281R3 F on the use of a pipeline transaction (among other steps) in an estate planning situation. The ruling involved the death of a taxpayer who owned shares in various private companies. The stated purpose of the planning was to restore at the shareholder level, the FMV of the corporation’s property (which would correspond to the adjusted cost base to the shareholder of the shares of the corporation).

The proposed transactions included the following general pipeline steps:

  1. Newco is incorporated and the estate transfers its private company shares to Newco in consideration for promissory notes issued to the estate.
  2. The companies remain separate legal entities and continue their business activities for a period of at least a year.
  3. After the period of at least a year, the companies are amalgamated with, or wound-up into, Newco (Amalco).
  4. Following the amalgamation or wind-up, Amalco progressively repays, over a number of years, the promissory notes.
  5. Amalco liquidates and dissolves into the estate and benefits will be distributed to the heirs of the deceased.

The CRA ruled favorably on these steps, thus confirming that pipelines are still appropriate post-mortem planning tools to avoid double tax on private corporation shares. The CRA concluded that certain technical rules of the ITA would not apply to produce adverse tax consequences, including section 84.1 and subsection 84(2) in respect of “surplus stripping” (rules that prevent removal of corporate assets without appropriate tax), and subsection 245(2) relating to the General Anti-Avoidance Rule (please refer to our previous Tax Alert for a more detailed background on the GAAR).

Importance of post-mortem structuring of pipeline transactions

The CRA has reaffirmed the use of pipeline transactions in post-mortem tax planning. It is however important to understand the potential tax pitfalls such as deemed dividends and anti-avoidance so that the desired tax consequences may be obtained through careful structuring.


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Maria Severino

National Tax Leader

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