Estate Freeze

Transfer appreciating assets (eg, to children) on a tax-deferred basis without losing control

The goal of an estate freeze is to transfer future increases in the value of an OpCo to the common shares of a Holdco.

  • typically limits the value of the parents’ shares to the value at the time of the freeze
  • parents retain the current value, but in a different form (e.g., common shares —> preferred shares)
  • tranferring assets directly could result in a deemed disposition

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There are five main uses for an estate freeze

  1. Income Splitting
  2. Creditor Protection
  3. Marital Considerations
  4. Probate Planning
  5. Incorporation Tax Benefits

Income Splitting

  • income and capital gains may be taxed in the hands of family members in a lower tax bracket
  • may give access to multiple lifetime capital gain exemptions

Note: watch out for the attribution rules and "kiddie tax"

Creditor Protection

  • freezor’s shares may be subject to claims due to personal guarantees or judgments favouring creditors

Marital Considerations

  • limits marital claims on the growth assets

Probate Planning

  • probate fees apply to the value of an estate
  • limits future growth of assets —> limits value of freezor’s estate —> reduces probate fees

Incorporation Tax Benefits

  • eg, could create another business to be frozen which is not related to the existing Opco

How It Works

Characteristics of the freeze shares

  • voting rights —> effective control
  • redeemable by issuer: Holdco can redeem them at any time
  • retractable by holder: shareholder can demand that they be redeemed
  • preference on liquidation
  • price adjustable if CRA challenges share value
  • dividend-paying (e.g., noncumulative)
  • non-impairable (e.g., dividends payable to other classes only if still able to retract)

see full size

In the diagram above

  • freeze shares
    • little or no participation in future growth (eg, preferred shares)
    • often the pre-existing shares
  • growth shares
    • equity shares with rights to future appreciation (eg, common shares)
    • initially have nominal value
  • family trust
    • often used to manage and administer property for the beneficiaries
      • gives some control
      • protects against employee mismanagement
      • trustees may be allowed to determine the beneficiaries
    • promissaory note


There are two ways to implement an estate freeze

  • Section 85 Rollover: a tax-deferred tansaction
  • Section 86 Reorganization: simpler and more popular

Section 85 Rollover

This is a tax-deferred transaction.

  • exchange Opco common shares for Holdco preferred shares with voting rights
    • same value
    • no capital gain (ACBpreferred = ACBcommon)
      • could increase ACB, which would trigger a current year taxable gain
  • preferred shares have a fixed value (eg, $600,000)

Section 86 Reorganization

This is simpler and more popular.

  • the steps
    1. exchange Opco common shares for preferred shares
    2. issue common shares of Opco (eg to children)
  • no Holdco is required
  • automatic tax rollover
  • no capital gain (ACBpreferred = ACBcommon)
    • can use Section 85 election form to cause a disposition of common share for amounts above the ACB


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