If a deceased owns shares in a private corporation there is a deemed disposition on death and capital gains tax will be payable by the estate.
In order to reduce the capital gains tax payable when a person dies owning shares in a private corporation the tax can often be eliminated by creating share redemptions which create a capital loss and a dividend that is realized by the estate. Double taxation is eliminated because s. 164(6) of the Income Tax Act allows the capital loss to be carried back from the estate to the terminal tax return of the deceased and this capital loss will offset the capital gains tax.
Beginning in 2016 life interest trusts will be subject to new legislation which to date does not allow the trust to elect to apply the capital loss realized on the share redemption against the capital gain reported by the life tenant at their death. The Income Tax Act does not yet allow the deceased’s estate to pull back the subsequent loss to the capital gain. This may be remedied by Canada Revenue Agency at a later date.
