Shane Onufrechuk, CA, Senior Tax Advisor at Davis LLP, wrote "Tax Traps & Tips: Death and Taxes - CRA Creates Uncertainty" for the October 2011 issue of Beyond Numbers, a publication of the Institute of Chartered Accountants of British Columbia.
An excerpt from the article:
In recent years, BC non-eligible dividend rates have increased significantly, but capital gains rates for individuals have remained the same. For this reason, when advisors are setting up post-mortem tax plans, there is an incentive, in many cases, to have the increased value of closely held corporations taxed (on death) at capital gains rates rather than dividend rates.
For 2011, there is a difference in top, marginal-tax-bracket rates of 11.86% between the rate of tax on capital gains and the rate of tax on non-eligible dividends. Where a deceased taxpayer has significant wealth tied up in the shares of an operating or holding company ("Holdco"), the tax savings associated with having such wealth taxed at the capital gains rate can be significant.
Ordinarily, the increased value of Holdco shares held by a deceased taxpayer is taxed at the capital gains rate by employing what is commonly referred to as the "pipeline strategy." Recent comments made by CRA have raised some concern about whether the pipeline strategy will work in all cases.