The short answer.
- At death you are deemed to sell everything at fair market value, including your private company shares, unless they pass to a spouse or spousal trust.
- The gain is taxed at the 50% inclusion rate on your final return. For a company worth millions, the bill can be large and due before heirs can sell anything.
- An estate freeze caps the growth taxed in your hands and shifts future growth to children or a family trust.
- Liquidity is the hidden problem. Corporate-owned insurance can fund the tax and flow out through the capital dividend account. Your lawyer drafts the wills and agreements; we coordinate the funding.
What happens to your shares when you die.
Subsection 70(5) of the Income Tax Act deems you to have disposed of your capital property immediately before death at fair market value. If your shares in an operating or holding company have grown, that gain lands on your terminal return.
Assets left to a spouse or qualifying spousal trust can roll over at cost, deferring the tax to the second death. Many owners therefore face the real bill when the surviving spouse dies, which is why joint last-to-die insurance is common.
The private company double-tax trap.
Without post-mortem planning, the same value can be taxed twice: once as a capital gain on the deemed disposition, and again as a dividend when the corporation's assets are paid out to the estate. Lawyers use pipeline and loss carry-back planning to manage this, and the timing rules are strict.
Read the capital dividend account guide for how insurance proceeds can bypass part of this problem.
Freezing the value today.
In an estate freeze, you exchange your common shares for fixed-value preferred shares, usually under section 86 or section 85. New common shares are issued to children or a family trust, so future growth accrues to them, not to your estate.
Your tax at death is then based on the frozen value. See the estate freeze strategy and our guides to the lifetime capital gains exemption.
Wills, multiple wills and probate.
In Ontario, many owners use a secondary will for private company shares to keep them out of the estate administration tax calculation. BC probate fees are roughly 1.4% of estate value over $50,000 for assets passing through the will. Alberta fees are capped at a few hundred dollars.
Powers of attorney matter as much as the will: if you lose capacity, someone must be able to vote your shares and sign for the company. These are legal documents your lawyer prepares.
Paying the bill without selling the business.
The tax at death is due within months. If the main asset is a private company or real estate, heirs may need to sell under pressure. Corporate-owned permanent life insurance can provide cash inside the corporation exactly when it is needed, and the proceeds above the policy's adjusted cost basis are generally credited to the capital dividend account.
For owners with partners, a funded buy-sell agreement ensures the surviving shareholders can buy out the estate. See also succession planning in Canada.
Frequently asked questions.
Does Canada have an estate tax?
Not by name. Instead, a deceased person is deemed to have sold their capital property at fair market value, and the resulting capital gains are taxed on the final return. For private company owners this often works like an estate tax.
What is the best estate planning strategy for a business owner in Canada?
There is no single best one. Common building blocks are an estate freeze, a family trust, updated wills including secondary wills where useful, a funded shareholders' agreement, and corporate-owned life insurance to provide liquidity. They should be designed with a lawyer, accountant and insurance advisor.
How is tax on private company shares paid at death?
From the estate. If the estate lacks cash, heirs may have to sell shares or corporate assets. Corporate-owned life insurance is often used to provide the cash, with proceeds flowing to the estate through the capital dividend account.
Who helps with estate planning for business owners in Vancouver?
Typically a wills and estates lawyer, a CPA and an insurance advisor working together. Goald & Co in Vancouver handles the insurance funding and coordinates with your lawyer and accountant.
Where to go deeper.
Primary sources cited in this guide
Disclaimer. This guide is general educational information published by Goald & Co Financial Inc. It is not tax, legal or accounting advice. Examples are illustrative composites, not real clients. Outcomes vary by province, corporation and shareholder facts and changes in law. Verify every figure with your CPA and legal counsel before acting.