The following is an illustrative, composite scenario, not a real, named-client matter. It is offered to show how an estate freeze and a section 85 reorganization are structured. This is planning work, not a dispute — the "outcome" here is a structure put in place, illustrated qualitatively.
The situation
In a representative reorganization matter, the founder of a growing private corporation wanted to plan for succession. The business had appreciated significantly and was expected to keep growing, the founder's adult children were becoming involved in the company, and the founder was concerned about the tax that would arise at death on the corporation's shares under the deemed-disposition rules — a liability that would only grow as the company did. The founder also wanted to keep control for the foreseeable future and retain access to the value already built up, rather than handing the business over outright.
The issue and the risk
Doing nothing is itself a decision with a cost. Under the Income Tax Act, capital property is generally deemed to be disposed of at fair market value immediately before death, so an ever-appreciating block of shares means an ever-growing tax bill for the estate. Without planning, that liability compounds silently year after year.
- Future growth in the company's value would accrue to the founder personally and be taxed in the founder's estate at the highest rates.
- Bringing the next generation in needed to be done in a way that did not trigger immediate tax on a transfer of valuable shares.
- The plan also had to preserve flexibility — the founder wanted continued voting control and a defined claim on the value already built up.
- The structure had to be implemented carefully, because anti-avoidance rules and the attribution rules can undermine a freeze that is not properly constituted.
The approach Barrett Tax Law took
The planning centred on an estate freeze implemented through a tax-deferred reorganization. A freeze is essentially a way of fixing the founder's tax exposure at today's value and shifting tomorrow's growth — and tomorrow's tax — to the next generation.
- Freeze the current value. The founder exchanged common shares for fixed-value preferred shares equal to the company's present worth, "freezing" that value in the founder's hands and capping the future tax on it. The preferred shares were given a redemption value and the attributes needed to support the freeze.
- Use a section 85 rollover. The exchange was carried out on a tax-deferred basis under section 85 of the Income Tax Act, with an elected amount chosen so that no immediate disposition was triggered by the reorganization itself.
- Direct future growth to the next generation. New common shares — which carry the future growth — were issued to a family trust for the benefit of the children, so post-freeze appreciation accrues to them rather than to the founder's estate, while keeping flexibility over which beneficiaries ultimately benefit.
- Preserve control and access. The structure was designed so the founder retained voting control through the share terms and a defined claim on the frozen value via the preferred shares.
- Consider the capital-gains exemption. The plan was reviewed with an eye to the lifetime capital gains exemption and whether the shares could be positioned as qualified small business corporation shares for the next generation.
Our corporate reorganizations page, the estate-freeze guide, the more detailed estate-freeze mechanics guide, the section 85 rollover guide, and the section 85 rollovers service page explain these mechanics in more depth, and the family trusts guide covers the trust side.
The illustrative outcome
In this illustrative scenario, the founder's exposure on the company's shares was capped at the frozen value, future growth was directed to the next generation through the family trust, and control was preserved — all implemented on a tax-deferred basis so the reorganization itself triggered no immediate tax. This is an illustrative planning structure, not an assured result; the right structure, and whether a freeze is appropriate at all, depends entirely on the family's circumstances and the company's facts.
Getting the details right matters
A freeze is conceptually simple but unforgiving in the details, and the value of the structure depends on getting them right. The valuation of the company at the freeze date has to be defensible, because it fixes the redemption value of the preferred shares and therefore the amount of the founder's frozen exposure — an aggressive or unsupported valuation can be challenged years later. The preferred shares need attributes that hold up: a redemption amount, a price-adjustment clause to address a later valuation dispute, and voting terms consistent with the founder's intended control. The trust that holds the new growth shares has to be properly constituted and administered, with attention to the attribution rules and to the trust reporting obligations that now apply more broadly. And the whole structure should be reviewed against the general anti-avoidance rule and the specific provisions that can apply to non-arm's-length transfers of shares. Done carefully, the freeze achieves exactly what the founder wanted; done loosely, it can unravel under scrutiny.
The takeaway
An estate freeze is a way to put a ceiling on a tax liability that would otherwise keep growing with the business. Implemented through a section 85 rollover, the value built up to date stays with the founder while future growth — and the future tax — shifts to the next generation, often without triggering tax on the reorganization itself. The value of this planning is greatest before a major increase in value, which is why it is worth considering early and revisiting as the business and the family change. For owners thinking about the larger picture, our succession-planning guide puts a freeze in the context of an overall plan.
Past results do not guarantee a similar outcome. Each matter turns on its own facts. This is an illustrative scenario provided for general information and is not legal advice.