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FBC Case Study

Saving $2.6 Million: How FBC Helped an Estate Minimize Tax Liability


Building, Protecting, and Leaving a Legacy

Imagine losing a loved one and then facing a mountain of tax debt that threatens their legacy. This was the heartbreaking reality for David Thompson*, who tragically lost his sister and brother-in-law in a short period of time.

Complex tax laws can threaten to erode the value of your estate, potentially diminishing the legacy you leave behind. In this real-life example, we saved a family $2.6 million in taxes, ensuring their loved one's hard work wouldn't be lost.

Doing Accounting at Home: Happy Couple Using Laptop Computer, Sitting on Sofa in Apartment. Young Family Filling Tax Forms, Mortgage Documents, Bills, Checks, Balances, Invoices are in Order

The Problem

Evelyn and Jim Smith* built and ran a successful Canadian corporation together for many years. Like many business owners, they relied on FBC's expertise to navigate the complexities of corporate tax filing and keep more money in their pockets.

After Evelyn’s sudden passing, Jim was left sole owner of the corporation and co-executor of his wife’s estate alongside their lawyer. Tragically, Jim departed this world before Evelyn’s affairs could be settled. This left their lawyer as the sole executor responsible for finalizing the estate and maximizing benefits for the beneficiaries.

Filing returns for someone who passed is challenging under the best of circumstances. In this case, the corporation had significant assets – which included a sizable chunk of property – and the estate faced a high tax burden that could significantly erode the value of the inheritance.

This is where FBC stepped in. Understanding the legal obligations faced by the lawyer and wanting to protect the Members’ legacy, Jay Gilliland, our Local Tax Consultant (LTC), prioritized minimizing the tax burden for the estate.


The Solution

Once Jay got up to speed on the file, he began to run scenarios on the best strategy for the estate. Usually, when corporations keep operating as is, and the tax implications are left until estate time, the outcome typically transpires in one of two ways.

“It is important to note that upon passing, an individual’s assets are deemed sold at fair market value (FMV), and any resulting tax event is realized,” said Jay. “Transfers to a surviving spouse will be ‘tax-free,’ as they are automatically transferred at tax cost (you could choose to transfer at FMV if you wish), but when the last to die spouse passes, all tax implications must be realized.”

In the case of when the last spouse passes away, (or in cases where there is no spouse), a corporation's common shares must be sold at their FMV, resulting in a capital gain. However, as Jay points out, this does not address the fact that the corporation’s shareholders will continue to withdraw taxable funds from the company in the future, resulting in a double taxation issue, as no benefit is realized from the capital gain deemed on the shares at the time of death.

“The estate paid capital gains tax on the value of the company,” explained Jay. “However, this provides no relief to the tax event of the shareholders withdrawing funds from the company in the future. The value is still ‘trapped’ in the corporation, and thus the double taxation issue arises.”

There are two primary methods to deal with the double taxation concern: loss carryback and the pipeline method.

Scenario A: Loss Carryback Method

This strategy involves liquidating all corporate assets, distributing the proceeds as a dividend to the estate, and winding the corporation up within 12 months of the death. Upon wind-up of the corporation, the shares of the corporation would be considered redeemed at their fair market value (of nothing). This disposition value is less than the adjusted cost base (ACB), which was re-set upon the deceased’s passing and creates a capital loss in the estate.

Subsequently, a loss carryback is filed on the terminal or final T1 tax return for the deceased to offset any capital gain realized from the liquidation.

Important Considerations: This strategy is time-sensitive and can only be implemented within the year of passing to avoid double taxation. The estate involved must be a graduated-rate estate, which comes with specific criteria. This option may not provide the most efficient tax reduction (i.e. what could be accomplished with a well-written will), but it can solve a double taxation problem. Most importantly, the loss carryback method is audited nearly 100% of the time as it typically involves significant dollars – all your paperwork and supporting documentation must be ready for this inevitability.

• Liquidate all corporate assets and wind up the corporation within 12 months (or one year) of passing.
• Distribute proceeds as a dividend to the estate.
File a loss carryback on the terminal T1 tax return to offset the capital gain arising on death.
Potential for higher tax liability due to the concentrated value in the surviving spouse's estate.
Typically triggers a Canada Revenue Agency (CRA) audit – make sure you have all the supporting documentation and paperwork ready.

Scenario B: Pipeline Method

This strategy involves incorporating a new company (“Newco”) within 12 months of the passing. The existing property shares are then sold to Newco at fair market value. This creates a shareholder loan owed by Newco to the estate. The tax due would then be only on the capital gain arising from the disposition at the time of death.

Here's the benefit: Future withdrawals from the corporation, up to the maximum amount of the shareholder loan, can be made tax-free, essentially treated as loan repayments.

Important Considerations: This strategy is time-sensitive and can only be implemented within the year of passing to avoid double taxation. It's not an option for transactions while the original shareholder is still alive. Also, the pipeline method has a specific order of functions that must be followed for several years after the death to remain tax compliant.

• Incorporate a new company (Newco) within 12 months (or one year) of passing.
• Sell existing property shares to Newco at fair market value.
• Create a shareholder loan owed by Newco to the estate.

• Pay tax only on capital gain upon death
• Withdraw funds from Newco tax-free (up to the loan amount) as loan repayments.
•Must follow a specific order of functions for several years after death to stay CRA compliant.

In the case of the Smith family’s estate, the loss carryback method was used.

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CRA Complication: An Unexpected Audit and Information Review

Because this case involved liquidating the assets of a corporation, Jay had to file a T3 return – this reports any income the estate earns after the death of an individual and before the distribution of the estate’s assets. He also filed the terminal or final T1 personal income tax return for the deceased Member.  As expected, filing the loss carryback of the T1 for several million dollars triggered a CRA audit that would require FBC to provide documentation and support for both the T3 and T1 returns.

At this point, Jay called on FBC’s audit team for support. As with all audits handled by FBC, the audit team acts as the liaison between the Member and the CRA while keeping the LTC, in this case Jay, informed of the file's progress.

Harshida Patel, FBC audit specialist, worked diligently to provide the necessary backup and paperwork to meet the CRA’s audit requirements.

“Audits are very stressful,” said Harshida, adding that she always tries to put herself in the Member’s shoes. “But it’s best to stay calm, be professional, provide the necessary information, and go step by step.”

While FBC’s audit team is highly experienced in dealing with the CRA, no one can predict how long an audit will take. In this case, it took even longer because the file was reassigned to a new auditor midway through.

Harshida maintained regular contact with the new CRA auditor and ensured they had all the necessary documentation.  This included:

  • Documentation like corporate resolutions, shareholder registers, director registers, etc. All these documents needed to show the deceased was removed from the corporation within one year of passing.
  • Additionally, the CRA wanted the correspondence between the accountant and the executor showing the plan was in place and being executed well before the one-year expiry date.

When the T3 audit was eventually confirmed, the FBC team received another letter from the CRA. This time, the T1 department was requesting additional information, which caused some delays in the processing of the return.

Once again, Harshida collaborated with Jay as well as Audit Specialist Alesha Vannatter to complete the requested T1 paperwork, which required an adjustment for accuracy and to maximize tax savings. In between all this back-and-forth, Alesha was tasked with providing new authorization forms per another CRA request.

While these additional delays were less than ideal for the estate’s executor, there is little recourse when this happens.

“There’s really no way that we can rush CRA,” explained Alesha, adding that sometimes making a personal plea to your Member of Parliament (MP) can help speed things up.

While FBC does not provide this service, audit team Members like Alesha can help guide Members on what to say.

“I've seen instances where an MP's office helped expedite files, moving a six-month wait time to just a month,” she said. “It's not a guaranteed shortcut, but it can definitely nudge things along in the right direction.”


While navigating the complexities of the tax system can be daunting, this case study demonstrates the power of a dedicated team. Over the course of 24 months, FBC's expertise and unwavering professionalism ensured all tax matters were meticulously addressed, including the T3 audit, T1 review, and additional administrative requirements. This comprehensive approach saved the estate $2.6 million and paved the way for a smooth probate process for the executor.

The Bottom Line: Your Legacy, Secured

This case study is an excellent example of how FBC can help you plan for the future and protect your loved ones. Just like we helped this family save $2.6 million in taxes, we can work with you to develop a tax strategy that minimizes burdens and maximizes the value of your legacy.

While the loss carryback method works, there are many more details and requirements necessary to execute this strategy correctly and survive a CRA audit. If you recognize a circumstance where these scenarios may apply to your corporation, reach out to our specialized tax team for assistance.

*Confidentiality Note: We have used pseudonyms for the individuals mentioned in this case study to protect privacy.

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