Post-Mortem · 12 min read
The 50% Solution vs. the 100% Solution under s. 164(6)
Why the 50% Solution usually wins on long-term tax cost — preserving CDA and avoiding the s. 112(3.2) stop-loss grind on the estate's capital loss carry-back.
The post-mortem problem
On death, the shareholder is deemed to dispose of their shares at fair market value — triggering a capital gain on the terminal return. If the corporation then redeems those shares from the estate, the redemption is a deemed dividend. Without planning, the same economic value is taxed twice: once as a capital gain on the terminal return, once as a dividend in the estate.
s. 164(6): the loss carry-back
s. 164(6) lets the estate carry back a capital loss realized in its first taxation year against the deceased's terminal capital gain. The redemption creates that capital loss (proceeds = paid-up capital, ACB = fair market value at death). Carried back, it eliminates the double tax.
s. 112(3.2): the stop-loss grind
s. 112(3.2) reduces the estate's capital loss by the lesser of (a) the capital dividend received and (b) 50% of the lesser of the loss and the terminal gain. Translation: if you elect 100% of the redemption as a capital dividend (the 100% Solution), the stop-loss rules grind down the loss carry-back and you re-create part of the double tax.
Why the 50% Solution usually wins
Electing only 50% of the deemed dividend as a capital dividend (the 50% Solution) leaves enough taxable dividend in the estate to keep the s. 112(3.2) grind small, preserves the bulk of the s. 164(6) loss carry-back, and keeps half of the original CDA credit available for future tax-free distributions to surviving shareholders. The arithmetic almost always favors the 50% path over a multi-year view.
When the 100% Solution still makes sense
If the estate has no other meaningful income, the surviving shareholders are exiting the corporation entirely, and there is no expected future use of the CDA, the 100% Solution can be simpler and the tax cost is acceptable. In every other case — ongoing operating business, surviving family shareholders, future insurance proceeds expected — the 50% Solution is the default.
This article is general commentary, not legal, tax, or insurance advice. Every situation depends on the specific corporate structure, shareholder agreements, and policy contracts in place. For a confidential review of how these ideas apply to your corporation, request a briefing below.
