There is no exception for illiquid private shares. The deemed disposition on death happens whether or not there is a buyer, insurance, or cash to pay the bill.
Short answer
The estate is deemed to have realized a capital gain on every share the owner held, immediately, with the tax due on the terminal return. Paragraph 70(5)(a) provides that on death “the taxpayer shall be deemed to have, immediately before the taxpayer’s death, disposed of each capital property of the taxpayer and received proceeds of disposition therefor equal to the fair market value of the property immediately before the death”, with no exception for a private company that has no ready market and no cash on hand.
The deemed disposition applies regardless of whether the shares can actually be sold, whether the company has retained cash, or whether any insurance exists to fund the resulting liability. The terminal-return tax bill is due on the estate’s ordinary filing and payment deadlines like any other year’s tax, which is exactly why a lack of planning turns into a liquidity crisis rather than just a paperwork problem.
Subsection 70(6) defers the deemed disposition entirely where the property transfers, as a consequence of death, to a surviving spouse or common-law partner resident in Canada, or to a qualifying spousal trust that meets specific income and capital conditions — but it does nothing for shares passing directly to children with no spouse or spousal trust in the will.
One file shows the sole founder of a specialty printing company dying unexpectedly with no shareholders’ agreement, no insurance, and a will leaving the company to his children — with no spouse or spousal trust available to defer the gain. A companion file shows what the deferral actually requires, and how easily a well-intentioned trust can fail it.
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