Estate Freeze

Canadian residents are subject to a deemed disposition on all their assets at the time of their death. This deemed disposition often triggers capital gains that must be reported on the taxpayer’s terminal tax return and can cause a significant income tax balance owing. Planning must be done to ensure that your beneficiaries have cash available to pay this tax. For business owners, an estate freeze is a common strategy that is utilized as part of this planning process.

Broadly speaking, an estate freeze is a strategy in which a business owner freezes the value of their shares for tax purposes and transfers the future growth of the company to another person, such as their child or a family trust. There are many benefits to this strategy. From an estate planning perspective, the freeze fixes the value of your shares so that you can calculate the capital gain that will be triggered on your death. This allows you to plan for the income taxes accordingly, such as by purchasing adequate life insurance. The freeze is also an important part of a business succession plan as it allows you to bring in a child or another individual to take part in the future growth of the business during your lifetime.

An estate freeze can be completed on a tax-deferred basis by completing a rollover. Generally speaking, a rollover involves exchanging property for other property that has the same fair market value, such as exchanging common shares of a business for preferred shares that have a fixed value. There are many different rollovers available under the Income Tax Act and the type of rollover to use depends on various factors. If all conditions are met and the rollover is completed correctly, the capital gain on the disposition can be reduced or eliminated at the time of the exchange and deferred until a future disposition.

Rollovers are complex transactions that require proper planning. In the case of a business owner wishing to conduct an estate freeze, it is imperative that you obtain proper documentation to support the current value of the company. A valuation of the company should be prepared based on commonly accepted business valuation methods. You must also consider your objectives with the transaction and analyze the rollover options available to you accordingly. One rollover may apply to a simple share-for-share exchange, whereas you may need to use a different rollover if you wish to receive a combination of cash and shares in the transaction. It may also be beneficial for you to recognize a partial capital gain on the transaction rather than deferring the entire amount, and different rollovers may be required for each option.

An estate freeze can provide significant tax and business benefits to you and your family. These are complicated transactions with many options available that can be tailored based on your needs and objectives. Please contact me to discuss further if you believe this may be beneficial to you.