The tax bill at death.

01At death, everything is treated as sold

Immediately before death, a person is treated as having sold their capital property at fair market value, and any gain is reported on their final tax return. For an owner of a private company, that means the shares are deemed sold, and the gain on decades of growth becomes taxable at once.

Two exceptions shape most plans:

• A spouse or spousal trust. Property left to a surviving spouse, or to a qualifying spousal trust, can roll over at its tax cost. The tax is deferred, not eliminated: it arrives on the second death.
• The lifetime capital gains exemption. If the shares qualify as small business corporation shares at death, the gain can be sheltered up to the exemption limit ($1,275,000 in 2026), less any exemption already used.

Registered plans follow their own rule: an RRSP or RRIF is generally included in income on the final return unless it passes to a spouse or another qualifying beneficiary.

02Why the same dollar is taxed twice

The deemed sale is only the first layer. The value the estate now owns is still locked inside the company. When the estate takes it out, typically by having the company redeem the shares, the payment is treated as a dividend. The estate has a high cost base in the shares after the deemed sale, but that cost base does not shelter a dividend. Without planning, the same value is taxed once as a capital gain and again as a dividend.

There can be a third layer. If the company holds investments that it sells to fund the payout, the company pays tax on its own gains first.

2026 Ontario top combined rates. Sources below.

03The tools that take it apart

Post-mortem planning is the work an executor and the family’s advisors do after death to remove one of those layers. The main tools are long-established. What changed recently is the time available to use them.

The loss carryback

The estate has the company redeem its shares. The redemption is taxed as a dividend, but it also creates a capital loss in the estate, because the estate’s cost base in the shares is high. That loss is carried back to the deceased’s final return, where it cancels the capital gain from the deemed sale. The result is one layer of tax, at dividend rates, instead of two.

Two conditions matter. The estate must be the deceased’s graduated rate estate, a status an estate can generally hold for up to 36 months, and an individual can have only one. And the stop-loss rules can reduce the available loss by capital dividends the estate receives on those shares, but only to the extent they exceed half of the lesser of the loss and the deceased’s gain on the shares. Where the company holds a large capital dividend account, often from life insurance, advisors therefore frequently pay roughly half of the redemption as a tax-free capital dividend and half as a taxable dividend, so that more of the loss survives. That trade-off has to be modelled, not assumed.

The pipeline

Instead of redeeming the shares, the estate sells them to a new holding company in exchange for a promissory note. The operating company and the new company are later combined, and the note is repaid over time out of the company’s assets. Repaying a loan is not a dividend, so the only tax is the capital gain already reported on the final return: one layer, at capital gains rates.

The Income Tax Act has anti-avoidance rules, which the Canada Revenue Agency applies to exactly this kind of transaction, so pipelines are built to the conditions the CRA has accepted in its rulings: the business carries on for at least a year before the companies are combined, and the note is repaid gradually, not in a lump sum. Families often obtain an advance ruling first. The CRA is more cautious where the company holds mainly cash or investments. If the lifetime capital gains exemption was claimed on the shares at death, the amount that can be paid out tax-free on the note is reduced. A pipeline can also cost the company tax accounts it would otherwise have used.

Life insurance owned by the company

A policy owned by, and payable to, the corporation brings in cash exactly when it is needed. The death benefit, less the policy’s adjusted cost basis, is credited to the company’s capital dividend account and can be paid to the estate tax-free. That cash can fund the redemption, pay the tax on the final return, or equalise the estate among children who are not in the business. See insurance that does real work.

What has to be in place before death

Each of these tools works best when it is prepared for. An estate freeze fixes the value of the owner’s shares today and lets future growth accrue to the next generation or a family trust, capping the gain that will be taxed at death. A freeze that uses a family trust brings its own rules, including a deemed sale of the trust’s property every 21 years and the split-income and attribution rules. Wills should give executors the authority the post-mortem plan needs. Shareholder agreements should not conflict with it.

04Probate: the cost that is easiest to avoid

Ontario’s Estate Administration Tax is $15 for every $1,000 of estate value above $50,000; estates of $50,000 or less pay none. Assets that pass outside the will are excluded: insurance, RRSPs, RRIFs and TFSAs with a named beneficiary, and assets held jointly that pass automatically to the surviving owner. Joint accounts with adult children need care: the law may presume the asset belongs to the estate unless a gift was intended.

Private company shares can often be kept out of probate too. Ontario courts have accepted the use of a secondary will for assets that do not need a probated will to be transferred, and private company shares are the typical example. For an estate whose other assets already exceed $50,000, keeping $5,000,000 of shares out of probate saves $75,000 of Estate Administration Tax. It requires careful drafting by an estates lawyer.

05The executor’s timeline

• Final tax return. For a death between January 1 and October 31, the final return is generally due April 30 of the following year; for a death in November or December, six months after the date of death. If the deceased, or a spouse living with them, carried on a business, the filing date is June 15 of the following year (six months after death for a death between December 16 and 31), but any balance owing is still due on the normal date.
• Ontario Estate Information Return. Due to the Ministry of Finance within 180 days of the estate certificate being issued.
• Loss carryback window. Losses realised in the graduated rate estate’s first three taxation years can be carried back, for deaths on or after August 12, 2024.
• Graduated rate estate. Generally up to 36 months after death.
• Clearance certificate. Executors who distribute the estate before obtaining a clearance certificate from the CRA can be personally liable for unpaid tax.

06Questions to bring to your accountant and lawyer

• If I died this year, what would the tax on my final return be, and where would the cash come from?
• Which post-mortem strategy fits our company: loss carryback, pipeline, or a combination?
• Do my wills give my executors the authority and the tools to carry it out? Do I have a secondary will for my private company shares?
• Would an estate freeze, or a refreeze, make sense now?
• Does our shareholder agreement work with the plan, or against it?
• Is the company’s life insurance owned and payable in the way the plan assumes?