Valuing a Business for an Estate: A Guide for Executors and Accountants

When a business owner dies, the executor may need to establish the value of the owner’s shares or business interest as at the date of death. In practice, that often means reconstructing the business at a past date while it keeps operating and changing.

The valuation may affect the deceased owner’s final tax return, the administration of the estate, a transfer to beneficiaries or a negotiation with surviving shareholders. This guide is for executors, accountants and estate lawyers in Manitoba and Saskatchewan. It explains what to clarify, what to preserve and how the advisers can work together.

Why an estate may need a business valuation

For Canadian income tax purposes, a person who dies is generally considered to have disposed of their capital property immediately before death at fair market value, subject to rollovers and other tax rules. If the deceased owned shares of a private corporation, there is no market price to look up. An independent valuation can establish the fair market value used on the final tax return.

A valuation may also be needed to:

• Support the distribution of the estate.
• Help with a sale to surviving shareholders or a third party.
• Apply a buy-sell provision in a shareholder agreement.
• Establish the value transferred to a trust or beneficiary.
• Support insurance-funded succession arrangements.
• Support negotiations among beneficiaries or shareholders.
• Establish the starting point for a later sale by the estate.

These purposes are not interchangeable. A value prepared for the final tax return will normally use the date of death and fair market value. A shareholder agreement may set a different formula, process or date. The lawyer and accountant should identify the purpose before the valuator starts.

The valuation date is usually central

A business valuation reaches a conclusion as at a specific date. For an estate tax valuation, that is usually the date of death. The report may be written months later, but it must look at the business as it was on the valuation date.

After the owner’s death, the company might lose or renew an important contract, see employees or customers leave, receive insurance proceeds, appoint new management, sell assets, take on financing, report stronger or weaker results, or be sold.

Later events cannot simply be inserted into the historical valuation as though they were known on the date of death. But information that comes to light later can sometimes confirm conditions that already existed then. The valuator has to separate evidence about the business at the valuation date from the effects of later decisions and circumstances.

Identify what the deceased actually owned

Before valuing “the business”, confirm the legal interests the deceased held. They may include common or preferred shares, voting or non-voting shares, shares in more than one corporation, a partnership interest, a shareholder loan owed by the company, real estate or equipment owned personally and used by the company, and life insurance or other assets tied to the succession plan.

These interests may need separate treatment. An owner might hold all the shares of an operating company and personally own the building it operates from. The business valuation would not automatically include that real estate, and a separate real estate appraisal may be needed. A shareholder loan is also different from share ownership: it may be an amount the company owes the estate, subject to its terms and whether it can be repaid.

Compare the corporate records, the will, the shareholder agreement and the financial statements so the engagement clearly identifies what is being valued.

Review the shareholder agreement and succession documents

A shareholder agreement may set out what happens when an owner dies, including a mandatory purchase of the deceased’s shares, a pricing formula, how a valuator is appointed, a valuation date, how insurance proceeds are used, restrictions on transfers, payment terms and how disputes are resolved.

Give the complete agreement and all amendments to legal counsel and the valuator. The agreement’s definition of value may differ from fair market value for tax purposes, and it may say whether the deceased’s interest is valued as a proportionate share or treated another way. Where the estate needs values for more than one purpose, separate calculations or reports may be needed, and the instructions should state which question each conclusion answers. Our guide to shareholder buyout valuations covers how agreement terms shape the valuation instructions.

Owner dependence can affect the value

In an owner-managed business, the deceased may have managed employees, prepared estimates, held professional licences, kept the key customer relationships or approved every major decision. Their death can change expected earnings and business risk. The analysis should consider:

• Whether the business could continue without the owner.
• Which duties had to be replaced, and at what market cost.
• Whether employees could take on some of the work.
• Whether customer relationships belonged to the company or to the owner personally.
• Whether the death changed any contracts or licences.
• Whether a transition plan already existed.

The effect is not always negative. A company with experienced managers and documented systems may carry on with little disruption. The aim is to assess the business at the valuation date on the facts available, not to assume that every owner-managed business loses its goodwill when the owner dies.

Reported income may need to be normalized

Private-company financial statements often reflect decisions the owner made for tax, compensation or personal reasons. The valuator may need to adjust for owner pay compared with replacement pay, wages paid to family members, personal or discretionary expenses, related-party rent, unusual legal or professional fees, one-time repairs, income or costs from assets unrelated to operations, unusual bonuses or dividends, and costs arising from the death or the transition. Each adjustment needs evidence.

For a broader explanation of normalized earnings, valuation approaches and business risk, see how a CBV values a small business.

Separate operating assets from other property

A private corporation can hold assets it does not need for daily operations: excess cash, marketable securities, surplus equipment, vacant land, personal-use assets, loans to shareholders or related companies, and investments in other businesses. The valuator should determine which assets generate the company’s maintainable earnings and which can be considered separately.

Cash needs particular care. A bank balance is not automatically excess cash; part of it may be needed for payroll, inventory, seasonal working capital or planned capital spending. Debt and shareholder loans also have to be treated consistently when moving from the value of the operating business to the value of the shares.

If real estate, machinery or specialized equipment is a significant part of the value, the business valuator may need to rely on a qualified appraiser. Acadia Hill also prepares machinery and equipment appraisals.

Taxes: keep tax advice and valuation separate

The valuation sets the value of the specified interest under the engagement instructions. The accountant applies the tax rules, which may involve:

• The deemed disposition on death.
• A rollover to a spouse, common-law partner or qualifying trust.
• Whether the shares qualify as qualified small business corporation shares, and the capital gains deduction.
• The adjusted cost base of the shares.
• Changes in value after death, and a later sale by the estate.
• Loss carrybacks and other post-mortem planning.
• Life insurance proceeds and the company’s capital dividend account.

These issues can change the tax ultimately paid, but they do not allow the parties to choose a convenient business value. If the estate later sells the shares, CRA measures the gain or loss on that sale against the fair market value reported at death, so consistency and supporting evidence matter. The executor should get tax advice early enough to keep planning options open and meet filing deadlines.

If the owner had planned ahead with an estate freeze, the earlier freeze valuation and share terms are useful background. See estate freeze business valuations.

Choose the scope for the intended use

CBV Institute’s current standards recognize three levels of valuation conclusion:

All three levels must result in a credible and properly supported conclusion. The right level depends on the intended use, the users, the information available and the circumstances. An estate file may involve tax filings, beneficiaries, surviving shareholders or a later sale, so tell the valuator who will use the report and whether disagreement or outside scrutiny is expected.

Under Practice Standard No. 120, the valuator must have a written engagement agreement with clear instructions. It typically covers the interest being valued, the valuation date, the purpose and intended users, the expected scope of work and report level, any known limitations, the responsibilities of each party, and timing. If beneficiaries or shareholders are already in dispute, or the matter may go to court, say so at the start: expert reports have different requirements, and your lawyer should help define the assignment.

Coordinate the advisers

An estate business valuation works best when each adviser has a defined role.

One adviser should coordinate requests so the company and the executor do not receive conflicting instructions. The advisers should also list unresolved issues in writing, such as disputed ownership, incomplete records, uncertain shareholder loan balances or disagreement about which agreement provision applies.

What if the records are incomplete?

Incomplete information is common in estate files, especially where the deceased owner kept the books and the business relationships to themselves. Start with what exists. The company’s accountant or bookkeeper, corporate tax returns, bank and payroll records, lenders, customers and suppliers, surviving managers, corporate counsel, government filings and any prior valuations or transaction documents can all fill gaps.

Missing information can still limit the work. Under the CBV Institute standards, significant inputs and assumptions must be supported at every level, and the valuator must consider how far the scope of work has been limited. Unavailable financial statements, missing key documents and an inability to speak to management are all examples of possible scope limitations. If a limitation is serious enough to jeopardize the credibility of the conclusion, the valuator must not issue one. Bringing the valuator in early gives the executor more time to find records and talk to the people who know the business.

When should the valuation begin?

Contact a valuator soon after the need becomes clear. The report may not be needed right away, but early scoping helps the executor preserve evidence, spot other appraisal needs and line the valuation up with tax and legal deadlines. The first conversation should answer five questions:

1. What property or business interest must be valued?
2. What is the valuation date?
3. Why is the valuation needed?
4. Who will use it?
5. What information is available?

Once those are clear, the valuator can send a focused information request and recommend a scope. Accountants can read how referrals to Acadia Hill work.

Frequently asked questions

Is the valuation date always the date of death?

For the final tax return, the deemed disposition happens immediately before death, so that is usually the date. A shareholder agreement, a later sale or a distribution may call for a different date, so confirm the purpose first.

Can events after the date of death affect the value?

Only as evidence of what was already true, or reasonably knowable, on the valuation date. A later event caused by decisions or circumstances after death is not simply read back into the value.

If the shares go to a spouse, is a valuation still needed?

A rollover to a spouse or common-law partner may mean no capital gain on the final return, but a value can still matter: for the estate’s records, a buy-sell agreement, the Saskatchewan probate levy, or later planning. Ask the estate’s accountant whether one is needed in your case.

What if the owner kept most of the records?

Start with the company’s accountant, tax returns, bank records and surviving managers. Some gaps can be filled; others may limit the work. If missing information would make the conclusion unreliable, a valuator cannot simply ignore it and issue a number.

How long does an estate valuation take?

Many standard files are completed in about 15 business days after we receive the requested information. In estate files, gathering the records usually takes the longest, which is another reason to start early.

Business valuations for estates

Acadia Hill Capital Advisors provides business valuation services for executors, accountants, lawyers and business owners in Winnipeg, across Manitoba and, remotely, in Saskatchewan. We can help define the valuation assignment, identify the records needed and work alongside the estate’s other advisers. Contact Acadia Hill to talk about an estate business valuation. For other situations where a valuation is needed, see when you need a business valuation.

This article provides general information. Estate, legal and tax outcomes depend on the facts and on the advice of the estate’s legal and tax professionals.