Corporate structure
There are four ways out of your corporation. Which one were you shown?
The cash has to leave by one of those doors, and the spread between the widest and the narrowest is the whole of it.
Estate
Canada has no estate tax. So why do families lose three quarters of it?
There is no estate tax and no gift tax here. The bill arrives from two other places instead, and on a lot of files from a third.
Somebody told you Canada has no estate tax and you relaxed a little. They were right. No estate tax, no gift tax, and none since 1971.
There are retained earnings in the corporation. There is a will, drafted some years ago, and the shares are mentioned in it somewhere.
What nobody has done is put a number on what leaves the family on the day you die. That number exists today. It can be worked out this afternoon from returns you have already filed.
What it comes to
$1,215,000
What reaches the family from $5,000,000 of retained earnings, with no plan in place
The combined bill comes to about $3.79 million. That worked example assumes a nominal cost base on the shares and no planning at all, and it uses illustrative Canadian combined rates. It shows the shape of the problem, not any family's result.
How does one dollar get taxed twice?
You die owning shares in your private corporation. First, you are deemed to have sold them at fair market value on the day you died. Nothing was sold. Nobody received anything. The accrued gain is taxed on your final return anyway.
Second, the company still has to get the money to your family. Winding it up, or redeeming the shares from your estate, creates a deemed dividend. That is taxed again, this time in the estate.
Same value, two taxes. Neither of them is called an estate tax, which is exactly why nobody plans for it.
75.7%
The two layers stacked, with no post-mortem planning
Capital gains to the deceased at roughly 26.8%, then dividend tax to the estate at roughly 48.9%. Illustrative combined rates from our own advanced planning material, on a nominal cost base.
And where does the third one come from?
On a lot of files there is a third tax, and it sits in front of the other two rather than behind them.
If the corporation is holding a portfolio, a property or an operating business rather than cash, it has to sell something to hand your family the money. That sale triggers tax on the corporation's own accrued gain, before anybody has inherited anything.
Three taxable events, one dollar, and the family only ever built it once.
How much of that applies to you depends on what your corporation is holding. On pure cash the first layer does not arise, and the two remaining layers still stack to roughly 75.7%.
What is it costing you before any of that happens?
There is a second thing running the whole time you accumulate, and it has nothing to do with dying.
Once your corporation's passive investment income passes $50,000 a year, it starts grinding away your small business deduction. Five dollars of deduction lost for every dollar of passive income above the threshold. At $150,000 of passive income it is gone entirely.
At around a 5% yield, roughly a million of corporate investments starts the grind. About three million wipes the deduction out. It is not dramatic in any single year, which is why nobody notices it, and it compounds for exactly as long as the pile sits there.
$5
Of small business deduction lost per dollar of passive income above $50,000
The pile of cash you are keeping for later is quietly raising the tax rate on the work you are doing now.
Which of the three jobs has your plan actually done?
Reduce. Land at the lowest rate available rather than stacking two taxes on one dollar.
Defer. Push tax to the next generation where it makes sense, so capital stays working inside the family longer.
Pay. Make sure the cash exists to pay whatever is left, without anyone having to sell the business under a deadline to raise it. That third one is the one people skip, and it is the one that ruins families. You can reduce a bill beautifully and still put your children in the position of selling a going concern in ninety days because there is no liquidity anywhere.
An estate freeze, a loss carryback under section 164(6), a pipeline, a corporately-owned policy. Which one fits depends on your corporate tax accounts and on where rates sit at the time. It is genuinely case by case, and every version of it needs a lawyer and an accountant on the file.
What is the gap between the two numbers worth?
Of the tools, corporately-owned life insurance is the only one that also produces the cash. Growth inside an exempt policy is not taxed annually, which also means it does not count toward the passive income that grinds your small business deduction.
The corporation receives the death benefit with no tax on receipt. The benefit above the policy's cost base credits the capital dividend account, and that flows out to shareholders without tax in their hands, where the conditions are met and the election is filed.
Put it alongside a loss carryback and the redemption gets funded by the death benefit rather than by selling something. On that same five million, planning of this kind takes the family's net share from $1,215,000 up toward the full amount.
about $3.79M
The bill on $5,000,000 of retained earnings with no plan in place
Avoidable, in a lot of cases almost entirely, but only if somebody looks at it while you are alive. Every structure described here needs a lawyer, an accountant, and an actuarially sound policy illustration before any insurance decision.
The arithmetic
| What happens | Tax |
|---|---|
| Deemed disposition at death creates a $500 gain | about $250 on the terminal return |
| Winding the company up creates a $1,000 deemed dividend | about $450 in the estate |
| On a thousand dollars of value | about $700 |
| Scale the same assumptions to $5,000,000 of retained earnings and the combined bill is about $3.79 million, with $1,215,000 reaching the family. Illustrative Canadian combined rates from our own advanced planning material, assuming a nominal cost base and no planning at all. Your own numbers will differ, sometimes substantially. | |
This week
None of them needs us, and none of them needs an appointment.
What to find out
When this is not your problem
Not every corporation is carrying this problem. If the retained earnings are modest, the shares have a real cost base, the lifetime capital gains exemption covers most of the gain, or the business is going to be sold in your lifetime anyway, then the arithmetic on this page is not describing you, and a freeze would be an expensive answer to a question you do not have. A freeze also has real traps. Valuation needs a price-adjustment clause in case the CRA disagrees, attribution rules can push income straight back into your hands if it is structured carelessly, and a family trust hits a deemed disposition at twenty-one years whether anyone diarised it or not. Some of what we are shown has already been structured properly by somebody else, and saying so is the whole of the advice on those files.
Is this one actually happening on your file?
Fifteen minutes on the phone is usually enough to tell. You describe the structure, we ask questions, and nothing is presented at you. There is nothing to send in advance and nothing arrives afterwards unless you ask for it.
Have the number worked outFifteen minutes. Nobody has ever regretted pricing this early, and plenty of families have found out late.
Read next
Business owners
If your co-owner dies tonight, who owns their half tomorrow?
The shares do not evaporate. They go somewhere, and if nothing was written down they go to an estate.
The article
Canada has no estate tax. Your family can still lose most of it.
There's no estate tax and no gift tax here. The bill arrives from two other places instead, and it can land on the same dollar twice.
Sources and cautions
Please treat every figure here as illustrative. The roughly 75.7% outcome, the $1,000 example and the $5,000,000 worked example come from our own advanced planning material, assume a nominal cost base on the shares and no planning at all, and use illustrative Canadian combined rates. They are there to show the shape of the problem, not to predict any family's result. Your own numbers will differ, sometimes substantially. Section references are to the Income Tax Act (Canada): 164(6) loss carryback, 112(3) stop-loss rules, 83(2) capital dividends, 89 capital dividend account, 12.2(1) exempt policy accrual. The lifetime capital gains exemption is $1,275,000 for 2026, indexed annually, and is available only on qualifying small business corporation shares. Passive income thresholds, small business deduction grind rules, capital gains inclusion rates and dividend rates all change, so confirm current legislation before acting on any of this. This is general information, not legal or tax advice. Every structure described here requires a lawyer and an accountant on the file, and an actuarially sound policy illustration before any insurance decision. Prabhjit Virk is not a Canadian CPA. Life insurance licences are held in British Columbia, Alberta and Ontario; Quebec is pending. Provincial rates and rules quoted here are British Columbia figures unless stated. Alberta and Ontario differ.