When a Corporation's Owner Dies

What happens to the owner's private-company shares at death?

The owner is generally treated as selling the shares at fair market value immediately before death, even though no buyer pays for them. The shares pass under the will or estate law; the corporation continues as a separate taxpayer. The estate generally acquires the shares at that same fair market value (Income Tax Act, section 70(5)).

The deemed sale may create tax without cash from an actual sale. Whether the executor can vote the shares, transfer them, or arrange a new director depends on the will, corporate records, and the law where the company was incorporated. For a federal corporation, a director's term ends on death, shareholders elect directors, and directors appoint officers (Corporations Canada). Provincial corporations have their own rules.

How do fair market value and adjusted cost base affect the final return?

The death-date share value is the deemed sale proceeds; subtract the deceased owner's adjusted cost base, or ACB, to find the capital gain or loss. The executor reports the share disposition on Schedule 3 of the final T1, even if the shares remain in the estate (CRA: capital gains when someone dies).

ACB is the owner's tax cost, adjusted for relevant past transactions. It is not the share's paid-up capital, which is a separate corporate tax measure used in a later redemption. Keep the death-date valuation and the ACB working papers: the estate's later gain or loss generally starts from the value used on the final return (Income Tax Act, section 70(5); CRA: later estate sales).

If the corporation owns life insurance on the deceased owner, get the policy records before valuing the shares. For the deemed disposition at death, the Act treats the policy's value as its cash surrender value immediately before death, rather than simply using the later death benefit (Income Tax Act, section 70(5.3)).

Insurance proceeds may increase the corporation's capital dividend account. The corporation elects on Form T2054 by the earlier of the dividend's payable or payment date. A valid election may let it pay a capital dividend to a Canadian-resident estate without dividend income, but the payment may reduce a later share loss; see Holding and investment corporations (Income Tax Act, section 83(2); CRA: T2054).

The final T1 and tax payment are generally due April 30 after death if death was by October 31, or six months after death if later. Self-employment can extend filing, not payment (CRA: deadlines). For qualified small business corporation shares, the executor can claim the lifetime capital gains deduction on the final T1 with Form T657 (CRA: gains at death; T657). For tax on the deemed sale, the executor can file Form T2075 by the tax payment date to elect up to ten annual instalments, with accepted security and interest (Income Tax Act, section 159(5); T2075). See Taxes when someone dies for full return and clearance steps and Selling your business for share qualification.

Can the shares pass to a surviving spouse or spousal trust without an immediate gain?

Yes, if the deceased and the spouse or common-law partner were both resident in Canada immediately before death, a qualifying transfer to that spouse generally uses the deceased owner's tax cost instead of fair market value. A qualifying spousal trust has a separate Canadian-residence test. The death gain is deferred, not erased (Income Tax Act, section 70(6); CRA: spouse transfers).

The property generally must become the spouse's or trust's irrevocable entitlement within 36 months of death. If that will not happen, the legal representative can request an extension from CRA before the period ends. A spousal trust must meet further conditions, including that the spouse receives all trust income during life and no one else can receive its income or capital during that life. The legal representative can elect on the final return to use fair market value instead for a particular property. Check the will and residency before assuming the rollover applies (CRA: spouse and spousal trust conditions).

Why can the same corporate value be taxed again when the estate takes money out?

The final T1 may tax the owner's increase in share value; it does not turn the company's retained value into tax-free cash for the estate. If the company redeems the estate's shares, the payment above those shares' paid-up capital is generally a deemed dividend to the estate (Income Tax Act, section 84(3)). A distribution on winding up can also be a deemed dividend (section 84(2)).

Paid-up capital may be much lower than the estate's new ACB. The deemed dividend is excluded from the proceeds used to calculate the estate's gain or loss on the redeemed shares, which can create a capital loss even while the estate has dividend income (Income Tax Act, section 54). The loss is not automatically available in full: share-loss reduction rules can apply, particularly if capital dividends were paid or certain dividends were allocated to another beneficiary (Income Tax Act, section 112(3.2)).

How can a share sale or estate loss election reduce the double-tax result?

An arm's-length sale of the estate's shares may produce little further capital gain if the sale price is close to the estate's death-date ACB. A corporate redemption instead may create dividend income and a share loss; if the estate qualifies, subsection 164(6) lets the executor move an eligible net capital loss to the deceased person's final T1 (Income Tax Act, sections 70(5) and 164(6)).

The subsection 164(6) election applies to a net capital loss of a graduated rate estate, or GRE, arising from its capital-property dispositions within the permitted estate tax years. The estate must qualify and designate itself as the GRE on its T3; an estate does not acquire that status merely by holding shares. GRE status lasts no more than 36 months after death. The elected loss stops being the estate's loss and becomes a loss on the deceased's final return. Its benefit depends on the final return's gains, deductions, and other income, and on the estate's dividend tax (CRA: GRE conditions; CRA: election instructions).

What is the deadline for a subsection 164(6) loss election?

For deaths after August 11, 2024, the estate can elect for an eligible loss arising in any of its first three tax years; for earlier deaths, CRA says the window was only the first estate tax year. The election for a particular loss year is tied to that year's T3 filing due date, not simply to an anniversary of death (CRA: election window; Income Tax Act, section 164(6)).

Subsection 164(6) sets the estate loss year's filing due date for both the election and final T1 amendment. CRA's T3 guide describes a later-of-T1-and-T3 rule. Use the estate T3 due date unless that conflict has been resolved for the case (Income Tax Act, section 164(6)(c) and (e); CRA: T3 Trust Guide).

Who controls and signs the corporation's continuing T2 returns?

The corporation's authorized officer signs its T2; the executor does not become that officer merely by being executor. For a federally incorporated company, shareholders elect directors, and directors appoint officers. If the deceased was the only director or officer, establish who can exercise the shares' voting rights under the will and applicable corporate law, then document the replacement appointments before signing (Corporations Canada; CRA: T2 certification).

The corporation still files a T2 for each tax year, including an inactive year, generally within six months after its own year-end. The estate's T3 and the deceased's final T1 are different returns for different taxpayers. See Filing your corporate return for the T2 process (CRA: T2 filing duty; CRA: T2 due date).

For a Quebec resident, the liquidator also files the deceased's TP-1 and, when required, the estate's TP-646. TP-1 is generally due April 30 after death, or six months after a November or December death; TP-646 is due within 90 days after the estate year-end (Revenu Québec: deadlines). A corporation with a Quebec establishment also files CO-17 (Revenu Québec).

Shares passing to the estate at death do not themselves trigger a short T2 year. A later sale that transfers control to an unrelated buyer can end the corporation's tax year immediately before the sale, requiring another T2 for that short year (CRA: T2 guide, lines 063 and 065).

If a redemption pays a taxable deemed dividend to a Canadian-resident estate, the corporation generally also prepares a T5 slip and files a T5 information return by the last day of February after the payment year. A capital dividend is not reported on a T5 (CRA: T5 Guide; T5 deadline).

Should the corporation continue, be sold, or be wound up?

Choose only after comparing who can operate the company, whether someone will buy the shares, what the corporation owes, and how distributions would be taxed. A quick payout can turn the estate's share value into a taxable dividend; waiting can miss a GRE loss window (Income Tax Act, sections 84 and 164).

Share ownership alone does not make someone pay corporate tax. But a non-arm's-length recipient of corporate property for less than fair value can owe up to the value shortfall and the corporation's covered income tax or GST/HST debt. CRA can assess at any time (Income Tax Act, section 160; Excise Tax Act, section 325). A director may owe unremitted payroll withholdings or GST/HST, subject to statutory conditions and a due-diligence defence. Recovery action or assessment generally must begin within two years after ceasing to be a director (Income Tax Act, section 227.1; Excise Tax Act, section 323).

If the estate intends to sell the business, see Selling your business for the share-versus-asset sale tax issues. If it intends to dissolve the company, follow Closing a corporation for the final corporate filings and tax accounts. A continuing business still needs authorized management and ongoing T2 filings.

What records should the executor gather before a sale or redemption?

Gather the records that establish ownership, authority, value, cost, and available time before agreeing to a share sale or corporate payout. The most useful set is:

• Death certificate, will, probate or appointment documents, and the date of death.
• Articles, bylaws, shareholder agreements, minute book, share register, and director and officer records.
• Evidence of the deceased owner's share ACB and the shares' paid-up capital by class.
• Death-date valuation support, recent financial statements, corporate tax returns, asset and liability details, any shareholder loan balance, insurance records, and the capital dividend account balance and election history.
• Planned sale or redemption terms, prior dividends, estate tax year-end, and estate T3 records.

The estate representative should notify CRA and provide proof of authority to obtain the deceased person's tax records (CRA: represent someone who died). The company needs its own authorized people and records for corporate decisions and returns (Corporations Canada; CRA: T2 certification).

Before distributing estate property, the executor should request CRA's clearance certificate on Form TX19. Without it, the executor can owe unpaid tax up to the value distributed, and CRA can assess at any time (Income Tax Act, section 159(2)–(3); CRA: clearance certificate). In Quebec, the liquidator also requests a distribution certificate on Form MR-14.A-V before distributing property or estate income. Without it, the liquidator can owe up to the value distributed; Revenu Québec generally has four years from distribution to assess (Revenu Québec: certificate; trust guide).

Example

Illustrative Canadian dollars, with no tax rates applied. An owner paid C$100,000 for private-company shares. Their fair market value just before death is C$1,000,000, and their paid-up capital is C$100,000. With no spouse rollover, the final T1 starts with a C$900,000 capital gain; the estate takes the shares at a C$1,000,000 cost.

If the company redeems those shares for C$1,000,000, the amount above paid-up capital is a C$900,000 deemed dividend. The estate may also have a C$900,000 capital loss because the dividend is excluded from share-sale proceeds. If the estate is a GRE and the loss survives the applicable restrictions, a timely subsection 164(6) election may move it to the final T1. This example assumes no capital dividend election; such an election may change the dividend tax and reduce the share loss. A buyer paying C$1,000,000 for the estate's shares would instead leave little further share gain, but the buyer and sale terms must be real.

Different for you?

• You need to prepare the final T1, estate T3, or clearance certificate: see Taxes when someone dies.
• The shares may qualify for the lifetime capital gains deduction, or a buyer wants corporate assets: see Selling your business.
• The estate wants to dissolve the corporation: see Closing a corporation.
• US property or a US-resident executor is involved: see Settling an estate across the border.
• A spouse or share recipient lives outside Canada: check the rollover and dividend withholding rules through Cross-border tax (Income Tax Act, section 70(6); CRA: capital dividends).
• The company is a professional corporation: ownership restrictions depend on its profession and province; see Professional corporations.
• A redemption or election is being considered now: have the death-date value, ACB, paid-up capital, T3 year-end, and proposed payout reviewed through corporate tax before the transaction or filing deadline.