What taxes apply when a business owner dies and the estate sells the business?

Two sets of federal tax rules meet when an owner dies and the estate sells the business: what is deemed to happen at death, and what the estate itself reports on a later sale. They run through the Income Tax Act and the CRA’s guidance. This page covers federal rules only. Provincial estate and tax rules are separate and not covered here.

The deemed sale at death

Under Income Tax Act s. 70(5), the taxpayer is deemed to have disposed of each capital property immediately before death and received proceeds equal to its fair market value at that time. Section 70(6) can apply instead where the taxpayer was resident in Canada immediately before death and, as a consequence of the death, property passes to a spouse or common-law partner resident in Canada, or to a qualifying spousal trust, if the property vests indefeasibly in them within 36 months after death, or a longer period the Minister allows on written application. Under s. 70(6.2), the legal representative can elect, in the deceased’s return for the year of death, that s. 70(5) apply instead. Section 70 contains other special rules as well, so check which apply to each property. The deemed disposition glossary entry covers the definition.

The estate’s own sale

The CRA says that if capital property is sold after the date of death by the estate, the capital gain is reported on a T3 Trust Income Tax and Information Return for the estate. It also says capital losses in the T3 Return can be carried back to the final return, and refers readers to its rules for a graduated rate estate. Under s. 164(6), where the legal representative of a graduated rate estate disposes of capital property in one of the estate’s first three taxation years and the capital losses in that year exceed the capital gains in that year, the legal representative may elect to have part of the losses treated as the deceased’s last-year losses. The section sets the conditions and the election deadline.

Clearance before payout

Under Income Tax Act s. 159(2), a legal representative (other than a trustee in bankruptcy) must obtain a clearance certificate from the Minister before distributing property in their possession or control in that capacity. Under s. 159(3), distributing without one makes the legal representative personally liable for those amounts to the extent of the value of the property distributed.

GST/HST on the estate

Under Excise Tax Act s. 267, and subject to ss. 267.1, 269 and 270, if an individual dies, Part IX (other than s. 279) applies as though the estate of the individual were the individual and the individual had not died, with exceptions for reporting periods. Under those exceptions, the individual’s reporting period ends on the day of death, and a reporting period of the estate begins the next day.