The problem: one business, taxed twice
When the owner of a private company dies, the Income Tax Act treats them as having sold their shares at fair market value the moment before death. The capital gain lands on the final return. That is tax number one.
The estate now owns the shares, and the company’s value is still sitting inside the company. To get it out to the beneficiaries, the estate has to take it out as a dividend, or wind the company up and receive a deemed dividend. That is tax number two, on the same value.
At top Ontario rates, a capital gain is taxed at roughly 27% and a non-eligible dividend at roughly 48%. Stack the two and a family can lose well over half the company’s value to tax, on money the deceased already paid tax to earn once.
Post-mortem planning exists to collapse those two layers into one. The two main tools are the pipeline and the subsection 164(6) loss carryback. This post is about the pipeline.
What a pipeline transaction is
A pipeline is a series of corporate steps that lets the estate pull the company’s value out as a repayment of debt instead of a dividend. It is called a pipeline because the money flows from the old company, through a new one, and out to the estate along a path that was built for the purpose.
The key is the high cost base. Because the deceased was taxed on the shares at fair market value, the estate now owns them with a cost base equal to that value. The pipeline converts that cost base into cash.
Here is the basic sequence:
- The estate incorporates a new company (Newco). The estate trustees are its directors and the estate is its only shareholder.
- The estate sells the deceased’s shares to Newco. The price is the fair market value of the shares at death, which is the same as the estate’s cost base. Newco pays with a promissory note (and sometimes some shares), not cash.
- No gain, no tax. The estate sold shares for exactly what they cost it, so there is nothing to tax on the sale. The estate now holds a note from Newco for the full value of the company.
- Newco and the old company amalgamate. After a waiting period, usually at least a year, the two companies combine into one. The combined company now owes the note and holds the assets to pay it.
- The note is repaid over time. The amalgamated company pays the estate in instalments. Each payment is a repayment of a debt, not a dividend, so it comes out tax-free.
The end result is that the value of the company reaches the beneficiaries having been taxed once, as a capital gain on the deceased’s final return, rather than twice.
Why estates do them
The short answer is that a pipeline keeps the capital gains tax and gets rid of the dividend tax. Capital gains are taxed at a lower rate than dividends, so of the two layers, this is the one you want to keep.
Take a company worth $2 million with nominal paid-up capital. Without planning, the deceased’s final return shows a $2 million capital gain, and when the estate winds the company up it also receives a $2 million deemed dividend. With a pipeline, the final return still shows the $2 million gain, but the $2 million comes out to the estate as repayment of a note. The dividend never happens.
There is another way to solve the double tax, and your accountant will usually weigh both.
The subsection 164(6) loss carryback. The estate winds up or redeems the shares, receives the deemed dividend, and realizes a capital loss on the shares (because it received a dividend rather than sale proceeds). The estate then elects to carry that loss back to the deceased’s final return and wipe out the capital gain. This keeps the dividend tax and gets rid of the capital gains tax. It is the reverse of the pipeline.
The loss carryback has a deadline. The loss must be realized within the estate’s first three taxation years as a graduated rate estate. That window used to be a single year; Bill C-15, which received Royal Assent on March 26, 2026, extended it to three years for deaths after August 11, 2024.
Which tool wins depends on the numbers. Broadly:
- A pipeline usually produces less total tax, because capital gains rates are lower than dividend rates. It suits an estate that can wait, and a company that will keep operating or holding its assets for a while.
- A loss carryback can be better when the company has tax-preferred pools, such as a capital dividend account from life insurance proceeds or refundable tax on hand, that can be paid out as tax-free or low-tax dividends. It also gives more certainty, because it rests on a specific provision rather than on CRA administrative practice.
- Some plans combine the two, using the carryback for the portion that can come out as a tax-free capital dividend and a pipeline for the rest.
That comparison is tax advice, and it belongs with the accountant or tax lawyer designing the plan. The point for a family reading this is simpler: if a deceased relative owned a private company, there is almost certainly planning to be done, and the cost of doing nothing is large.
The rules that make or break a pipeline
A pipeline is not written into the Income Tax Act. It works because the Act, read as a whole, lets it work, and because the CRA has said in a long line of advance rulings that it will not attack a pipeline that follows certain guidelines. Step outside those guidelines and the note repayments can be recharacterized as dividends, which puts the estate back where it started.
Three rules do the damage if a pipeline is done badly:
- Subsection 84(2). If a company’s funds are distributed to shareholders on the winding-up, discontinuance or reorganization of its business, the distribution is a deemed dividend. A pipeline that moves cash out too fast, or strips a company that has stopped operating, invites this rule.
- Section 84.1. This is the anti-surplus-stripping rule that applies when an individual or estate transfers shares to a non-arm’s-length corporation. It can grind down the note to the paid-up capital of the shares. Part of the planning is confirming that the estate’s cost base is the kind that section 84.1 respects.
- GAAR. The general anti-avoidance rule was amended in 2024 to add an economic substance test and a penalty. The CRA has confirmed that it will keep issuing favourable rulings on pipelines that meet its existing guidelines, so a conventional pipeline is not treated as abusive. An aggressive or unusual one might be.
The CRA’s guidelines, drawn from its rulings, come down to patience and continuity:
- The old company keeps carrying on its business, or holding its assets, for at least a year after the share transfer.
- Newco and the old company do not amalgamate, and no assets are distributed, until that year has passed.
- The note is repaid gradually after the amalgamation, not in a lump sum.
- Newco is a real company with a real purpose, not a shell created the week the assets are needed.
Many estates apply for an advance income tax ruling before closing. A ruling gives certainty that the CRA will not apply those three rules to the specific plan. It takes time and costs money, so smaller estates sometimes proceed on the strength of the published rulings instead, with their advisors’ guidance.
All of this is tax planning, and it is the accountant’s or tax counsel’s domain. Nothing in this post is tax advice, and we do not give tax advice. What follows is the part we do.
The corporate work: where a pipeline actually gets done
The accountant designs the plan. Someone still has to build it, and that is corporate law. A pipeline is a stack of corporate documents, each of which has to be right and in the right order, because the tax result depends on the steps having actually happened the way the plan says.
In a typical Ontario pipeline, the corporate lawyer:
- Incorporates Newco with share terms that fit the plan, and organizes it: by-laws, first directors’ and shareholder’s resolutions, registers, and the estate’s subscription for shares.
- Fixes the old company’s records. Family companies often have minute books that stop years before the death. Before the shares can be sold, there has to be a clean paper trail showing that the deceased owned them and that they passed to the estate. Share registers, transmission documents and missing resolutions get brought up to date.
- Papers the share sale. A share purchase agreement between the estate and Newco, the promissory note, the share transfers, the directors’ resolutions approving them, and the section 85 election if one is being used.
- Keeps both companies alive and compliant through the waiting year. Annual resolutions, annual returns, and any changes to directors or officers.
- Amalgamates the two companies once the waiting period has run: amalgamation agreement, resolutions, articles of amalgamation, and the post-amalgamation organization of the combined company.
- Documents the note repayments as they happen, so the record shows debt being repaid on the schedule the plan set.
Every one of those steps produces documents that the estate trustees sign, the accountant relies on, and the CRA may ask to see years later. The failure mode in a pipeline is rarely a tax theory that was wrong. It is a step that was skipped, a resolution that was never signed, or a minute book that cannot show who owned what.
That is the work we do at Wires Law. We act for estate trustees, alongside their accountant or tax counsel, to incorporate Newco, repair the old company’s records, prepare and close the transaction documents, and carry the companies through the amalgamation. We are Ontario-licensed and work with Ontario and federal corporations.
Who should be thinking about this
You should be asking about post-mortem planning if:
- You are an estate trustee or executor and the deceased owned shares of a private company: an operating business, a holding company, or a company that holds investments or real estate.
- You are a family member of someone who owned a company and died in the last year or two, and nobody has mentioned the words “pipeline” or “loss carryback” to you.
- You are an accountant with a client estate that needs a corporate lawyer to execute a plan you have designed.
- You are a business owner doing your own estate planning and want your will, shareholder agreement and corporate records set up so that your estate trustees can run a pipeline without friction.
The clock matters. The loss carryback has a hard three-year deadline, and a pipeline needs a year of patience built into it. The sooner the estate’s advisors are at the table together, the more options stay open.
If you are an estate trustee or an accountant with a pipeline to implement, book a consultation and we will walk through the corporate steps with you.
This post is general information about Ontario and federal corporate law and Canadian tax rules as of October 2026. It is not legal or tax advice.