Income Tax Act section 70(5) deems the owner to have sold every capital property, shares included, at fair market value immediately before death, and deems whoever inherits to acquire it at that same value. No money moves and the pending deal is untouched, but a capital gain is realised and tax falls due on a return filed for someone who cannot pay it.
Key takeaways
SECTION 01 OF 12
Marginal note: Capital property of a deceased taxpayer. Paragraph 70(5)(a): “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”.
Paragraph 70(5)(b) gives whoever inherits a cost “equal to its fair market value immediately before the death”, and s. 38(a) taxes half the gain. CRA puts it to executors as gains on property “deemed to be disposed, even if they are not sold on the date of death” — the Agency, not the Act.
SECTION 02 OF 12
A signed agreement, a closing a fortnight later, or a buyer who walks in month three changes nothing about what the Act deemed at that instant. If the estate then sells for less, the shortfall is the estate’s loss, not the deceased’s — the problem s. 164(6) exists to solve.
One override: subsection 70(5.3), Fair market value, takes a policy on the deceased’s life at cash surrender value, not death benefit. The rest is valuation — Treadstone Law on valuing private shares.
SECTION 03 OF 12
Subsection 70(6) turns the deemed sale off, and reads as conditions, not a choice: the property must pass on death to “the taxpayer’s spouse or common-law partner who was resident in Canada immediately before the taxpayer’s death” or a qualifying trust, and be shown to have “become vested indefeasibly” within 36 months.
The trust route is narrow: created by the will, resident in Canada, paying the survivor all income arising before their death, and exclusive — no one else may “obtain the use of any of the income or capital of the trust” in the survivor’s lifetime. Then “paragraphs 70(5)(a) and 70(5)(b) do not apply” and proceeds become “its adjusted cost base to the taxpayer immediately before the death”. Treadstone Law on the spousal trust.
SECTION 04 OF 12
Nothing is forgiven: the survivor inherits the cost base, so the gain surfaces when they sell or die. Subsection 70(6.2), Election, turns it off for property on which the representative “elects, in the taxpayer’s return of income under this Part” for the year of death.
CRA confirms the granularity — “The election is made on a property-by-property basis and cannot be made on a fraction of a single property” — and writes “locked-in” where the Act writes vested indefeasibly: a gloss, not the test. Electing out realises a gain deliberately, because a gain absorbs what a deferral wastes — unused losses, or the exemption. Treadstone Law: deferral not exemption, electing out, to use up losses.
SECTION 05 OF 12
If the business was never incorporated its goodwill sits in Class 14.1, under a different rule. Subsection 70(5.1) opens “Notwithstanding subsection (6)… in respect of a business carried on by the taxpayer immediately before the taxpayer’s death”: transferred on death to any person, it goes out at “the lesser of the capital cost and the cost amount to the taxpayer”.
Read that again: any person. Not confined to a spouse, and it overrides subsection (6) — so goodwill in an unincorporated business can pass to a child at cost while shares of the same business incorporated cannot. Subsections 70(9) and (9.01) roll farm and fishing land to a Canada-resident child on the same 36-month test: Treadstone Law on the child rollover.
SECTION 06 OF 12
If an outside buyer takes the shares at the value the terminal return used, nothing further happens: cost base equals price, so the estate’s gain is nil. The double charge appears only where value comes out of the company itself — a redemption, a wind-up, or an asset sale then a distribution.
Paragraph 84(3)(a) deems a dividend to the extent a redemption payment “exceeds the paid-up capital in respect of those shares”, and section 54 takes the same amount off the sale side, excluding “any amount that would otherwise be proceeds of disposition of a share to the extent that the amount is deemed by subsection 84(2) or (3) to be a dividend received”. The estate is taxed on a deemed dividend and books a loss of roughly the gain already taxed.
SECTION 07 OF 12
Subsection 164(6), Disposition by legal representative of deceased, applies where a representative administering a graduated rate estate has, in a year “within the first three taxation years of the estate”, “disposed of capital property of the estate” so that the year’s losses exceed its gains. Elected losses are then “deemed… to be capital losses of the deceased taxpayer… in the taxpayer’s last taxation year”.
The relief stops there: paragraph (f) bars any deduction “for a taxation year preceding the taxpayer’s last taxation year”. CRA directs the paperwork to a T1‑ADJ plus T3 Schedule 1, line 20 of which is headed “Total capital losses transferred under subsection 164(6)”.
SECTION 08 OF 12
Three years is recent, and CRA dates the change: “In the first tax year of a deceased person’s GRE, or first three years if the date of death is after August 11, 2024, the legal representative can elect to treat all or part of these losses as losses of the deceased person on the final return.” The Act now reads three years without qualification; the 2024 boundary is the Agency’s statement of whose death it reaches.
The status is not automatic. The section 248(1) definition reaches an estate only where “that time is no more than 36 months after the death”, it is a testamentary trust, the deceased’s Social Insurance Number is in its return, and it designates itself. It does set its own clock: s. 249(1)(b) makes its year “the period for which the accounts of the estate are made up” — unlike the corporate deemed year-end.
SECTION 09 OF 12
A redemption is a disposition to the corporation itself, which engages subsection 40(3.6): on a disposition of a share to an affiliated corporation, “the taxpayer’s loss, if any, from the disposition is deemed to be nil” — deleting the loss s. 164(6) exists to move.
Subsection 40(3.61), Exception — estate loss carried back, is the carve-out: on a 164(6) election the stop-loss applies “only to the extent that the amount of the loss exceeds the portion of the loss to which the election applies”. A second survives regardless, because an estate is a trust — s. 112(3.2) cuts a trust’s loss by dividends received, easing it only where “the disposition occurs during the trust’s first three taxation years”.
SECTION 10 OF 12
The technique usually called a post-mortem pipeline works from the opposite end: rather than have the corporation redeem the shares and produce a deemed dividend, the estate transfers them to a new company for a promissory note, relying on the cost base 70(5)(b) already gave it, which corporate value later retires.
Two provisions constrain it. Subsection 84(2) catches value appropriated “in any manner whatever” on a winding-up, and section 84.1 grinds cost base on a share “acquired by the taxpayer after 1971 from a person with whom the taxpayer was not dealing at arm’s length” by amounts “in respect of which a deduction under section 110.6 was claimed”. CRA also publishes views on how long the structure should stand; those are not in the Act and are not stated here. More on 84.1.
SECTION 11 OF 12
The terminal return is due on ordinary deadlines, whether or not the sale closed — paragraph 150(1)(b) extends the date only for a death after October, and CRA’s date grid states that the payment date does not move with the filing date.
For tax on the deemed disposition there is instalment relief: subsection 159(5) lets the representative elect, on furnishing security acceptable to the Minister, to pay in a number “(not exceeding 10) of equal consecutive annual instalments”, with interest under (7). Distribution has its own trap — (2) requires a certificate from the Minister first, and without one “the legal representative is personally liable… to the extent of the value of the property distributed”. Not the certificate the non-resident vendor needs; Treadstone Law on executor holdbacks.
SECTION 12 OF 12
None of this settles whether the sale survives. Whether the executor can sign, and whether the binding price is the letter of intent’s or the agreement’s, are questions of corporate law, the will and the contract: shares on a shareholder’s death, no shareholder agreement, agreement versus will, selling a business you never ran, the capital dividend account.
One boundary: this is federal income tax law, from the consolidation current to 2026-06-21. Ontario charges estate administration tax, Quebec administers its own, and provincial succession law decides when property vests; none of that is described here. See also exit provisions and incapacity short of death.
The deal itself isn’t automatically affected, but the tax position changes at the moment of death regardless. Section 70(5) deems the owner to have sold every capital property, shares included, at fair market value immediately before death, and a capital gain is realized right then — whatever a signed agreement or later closing does or doesn’t do afterward.
It defers the gain, it does not cancel it. Subsection 70(6) turns off the deemed sale where property vests indefeasibly within 36 months in a Canada-resident spouse, common-law partner, or qualifying spousal trust, but the survivor inherits the same cost base — so the gain surfaces later when they sell or die.
No, and it can be taxed twice. Where value comes out of the company itself through a redemption, the payment is deemed a dividend to the extent it exceeds paid-up capital, on top of the capital gain already realized on the terminal return — a double charge that a sale of the shares directly to an outside buyer at the same value would not create.
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