For deceased individuals who owned shares of a private corporation, the so-called “pipeline” transaction is a commonly used post-mortem tax planning strategy designed to minimize taxes on death. While the Canada Revenue Agency (the “CRA”) has, historically, consented to the use of pipeline transactions, it has usually imposed strict timing requirements that restrict the ability of the estate to access corporate funds in the years following death.  In a recent tax ruling, the CRA relaxed its position when corporate funds were used to pay taxes of the deceased.

Pipeline Strategy – An Overview

Under the Income Tax Act (“ITA”), an individual is generally deemed to have disposed of all his or her property at fair market value (“FMV”) immediately prior to death. Taxes will be payable on any capital gains realized on this “deemed disposition”.  This can often result in a hefty tax bill for the estate.

When an individual dies owning shares of a private corporation, an even greater problem of double taxation may occur. The first layer of tax arises from the deemed disposition of the shares at the time of death. A second layer of tax would also apply when the assets of the corporation are liquidated and distributed to the estate/beneficiaries. This distribution would be treated as a dividend for tax purposes. In this way the estate is taxed on the same value twice: first, as capital gains taxes due to the deemed disposition on death, and second, dividend taxes when the corporate assets are distributed to the estate.

A pipeline transaction is a commonly used tax planning strategy to avoid this double taxation issue.  The strategy takes advantage of the high cost base created by the deemed disposition on death, allowing the estate to extract corporate surplus on a tax-free basis.

To carry out a pipeline, an estate will typically transfer private company shares to a new corporation in exchange for a promissory note in a sum equal to the FMV of those shares at the time of death.  Because the shares have a high cost base (due to the deemed disposition on death), no tax would be triggered on the transfer. After a period of time, the two corporations can be amalgamated and the promissory note can be repaid.  The estate would receive the repayments tax-free, thereby avoiding the double taxation issue on private corporation shares.

CRA Requirements for the Pipeline

Historically, the CRA has accepted that an estate can utilize the pipeline technique to avoid double tax on private company shares. Yet, the CRA has consented to such transactions only when certain conditions have been met: (i) the company must continue to carry on its business following the issuance of the note; (ii) the repayment of the note won’t begin earlier than one year after its issuance; and (iii) repayment will be spread out over a period of at least a further 12 months.  Under more recent rulings, the CRA had extended the required timeline for the repayment of the note for up to an additional three to four years.

Where these time requirements are not met, the CRA has stated that it would re-characterize the repayment of the promissory note as a taxable dividend, thus creating the very problem of double tax that the pipeline is seeking to avoid.

Recent CRA Ruling: Loosening of Timing Requirements?

In many post-mortem situations, the funds held in a corporation are needed to repay the debts of the estate, including income taxes owing. As a result, the CRA’s strict timing requirements for the pipeline transaction can cause significant hardship where an estate doesn’t have other sources of cash to pay the taxes arising on death.

In a recent tax ruling (CRA Views 2018-0789911R3), the CRA relaxed its longstanding position and accepted that upon the transfer of the private company shares to a new corporation, an estate could immediately receive cash out of the surplus of the company in order to fund the taxes payable by the estate (i.e., the income taxes payable as a result of the deemed disposition on death).

In the CRA’s earlier position, the executors had to wait for at least a year before receiving any repayments through the pipeline strategy. Under this new ruling, the CRA has modified its historically strict position and allowed partial repayment of the note to help the estate fund the income tax liabilities of the deceased.

This change to the CRA’s historically rigid approach will be a welcome relief to executors and beneficiaries who may need faster access to cash than the CRA policy previously allowed. Yet, even though the CRA has relaxed its position regarding the timing of a pipeline strategy where the funds are used to pay taxes, it is not clear whether the CRA is willing to grant the same leeway in other situations – for example, where an estate has non-tax related debts or if the beneficiaries simply desire access to estate funds sooner.

Even if the CRA does not extend this relief further, the pipeline remains a crucial post-mortem tax planning technique to avoid double tax on death.  It is important, however, to understand the potential pitfalls of such planning and to structure a pipeline transaction carefully so as to ensure the desired tax results are achieved.

For more information on the pipeline transaction and assistance with post-mortem planning strategies, please contact our tax team.



Wesley Isaacs, J.D.

Taxation and Estates

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Contact Wesley

Direct: (905) 418-1700


Elise Liu, CPA, CA, MMPA

Manager – Taxation

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Direct: (905) 479-1700 ext. 4016