"Should I do an estate freeze or set up a holding company?" is one of the most common questions owner-managers bring to us, and it rests on a false premise: that the two are alternatives. They are not. An estate freeze is a transaction that freezes the value of what you own so future growth accrues to someone else. A holding company is a vehicle that owns assets — typically shares of your operating company — and sits above it in the corporate chain. One is an event; the other is a structure. The real questions are which problem you are solving, in what order the steps should happen, and whether you need one tool, the other, or both.

This article compares the two side by side: the tax mechanics, the provisions of the Income Tax Act that drive each, a worked numeric example of each, when each is the correct tool, when you deploy them together, and a decision framework you can apply to your own facts.

What an estate freeze actually does

An estate freeze converts your current common (growth) shares of a corporation into fixed-value preferred shares, then issues new common shares — usually to a family trust — to capture all future growth. Your interest is "frozen" at today's fair market value; everything the business earns above that point grows in the hands of the next generation. The objective is to cap the capital gain that will be taxed on your death, when you are deemed under subsection 70(5) of the Income Tax Act to have disposed of your shares at fair market value.

There are three common mechanical routes, and the choice between them is driven by the existing share structure:

Section 86 — an internal reorganization of capital. You exchange your common shares for fixed-value preferred shares under the articles of the same corporation. It is clean where the corporation has flexible share provisions and you own the shares directly.
Section 85 — a rollover. You transfer your shares to a corporation (often a new holding company) on a tax-deferred basis, taking back preferred shares plus, where useful, a promissory note. This route is used when a new entity is being introduced into the structure.
Section 51 — a straight share-for-share conversion under the existing share terms, with no separate agreement required, where the articles already permit the exchange.

The new growth shares are typically subscribed for by a discretionary family trust. The trust holds the future appreciation for the benefit of a class of beneficiaries (spouse, children, sometimes a holding company), which preserves flexibility over who ultimately receives value and allows the Lifetime Capital Gains Exemption to be multiplied across several beneficiaries on a future sale. For a deeper walk-through of the mechanics, see The Estate Freeze, Explained.

What a holding company actually does

A holding company ("Holdco") sits above your operating company ("Opco") and owns its shares. It does not itself carry on the active business. Owner-managers use a Holdco for four recurring reasons:

Creditor protection. Cash and investments that are not needed in the business can be moved out of Opco — where trade creditors and litigants can reach them — and up to Holdco by way of inter-corporate dividends. Dividends between connected Canadian corporations are generally deductible under section 112, so the cash can move without an immediate tax cost.
Tax deferral. Earnings paid up to Holdco as dividends, rather than out to you personally as salary or dividends, are not taxed in your hands until you actually draw them. This defers personal tax and leaves more capital invested.
Income splitting within limits. Where family members hold shares of Holdco, dividends can in principle be paid to them — but only within the tax on split income (TOSI) rules in section 120.4. More on that below.
Purifying Opco for the capital gains exemption. To qualify shares as Qualified Small Business Corporation (QSBC) shares for the LCGE, substantially all of the corporation's assets must be used in an active business. Stripping excess investments and cash up to Holdco "purifies" Opco so its shares stay onside.

The trade-off is that passive investment income earned inside Holdco is taxed at high corporate rates (with a refundable component), and passive income above $50,000 in a year grinds down the small business deduction available to the associated group. A Holdco is an asset-protection and deferral tool, not a way to escape tax on investment returns. See holding company tax strategy for how the pieces fit.

The tax mechanics, compared

The two structures are driven by different parts of the Act and aim at different exposures:

What is being managed. A freeze manages a future capital gain on death or sale — the deemed disposition under s.70(5) and the capital gains inclusion rate. A Holdco manages where assets sit and when personal tax is paid.
The provisions. A freeze runs on s.86, s.85 or s.51, plus the trust and the LCGE under section 110.6. A Holdco runs on the inter-corporate dividend deduction in section 112, the connected-corporation rules, and section 120.4 TOSI.
Inclusion rate. Capital gains in 2026 are taxed at a 50% inclusion rate. The 2024 proposal to raise the rate to two-thirds was deferred and then cancelled in 2025, so the rate actually in force is one-half — which is why capping a gain through a freeze remains valuable but is not as urgent as it briefly appeared.
The LCGE. For 2026 dispositions of QSBC shares, the LCGE is indexed to $1,275,000 per individual. A freeze into a trust can multiply that exemption across multiple beneficiaries; purification through a Holdco is often what keeps the Opco shares eligible in the first place.

Worked example 1 — the estate freeze

Sandra owns 100% of the common shares of Opco, currently worth $3,000,000 with a nominal cost base. She is 58, intends to keep running the business, and has two adult children. If she died today, subsection 70(5) would deem a disposition at $3,000,000, producing a $3,000,000 capital gain, of which 50% — $1,500,000 — is taxable. At a top marginal rate of roughly 53% on that taxable portion (combining federal and provincial rates on a large gain in a province such as Ontario) — an effective rate of about 27% on the gain as a whole — the deemed disposition costs her estate on the order of $800,000, before any LCGE claim.

Sandra implements a s.86 freeze. Her common shares become fixed-value preferred shares redeemable for $3,000,000. A new family trust subscribes for nominal new common shares. Five years later Opco is worth $5,000,000. The first $3,000,000 of value is still locked into Sandra's frozen preferred shares; the $2,000,000 of growth has accrued inside the trust, outside her estate. Her death-tax exposure on the business is now capped at the frozen $3,000,000 rather than the full $5,000,000 — she has removed $2,000,000 of future gain (about $535,000 of tax at the same effective rate of roughly 27% on the gain) from her terminal return, and the trust can allocate the eventual sale gain among the children so each may apply their own $1,275,000 LCGE.

Worked example 2 — the holding company

Raj owns Opco, which has accumulated $600,000 of retained earnings it does not need to operate. The cash is exposed to a pending commercial dispute, and the excess cash also threatens Opco's QSBC status because too high a share of its assets are non-active. Raj incorporates Holdco and reorganizes so Holdco owns Opco. Opco pays a $600,000 inter-corporate dividend up to Holdco; because the companies are connected, the dividend is deductible under section 112 and moves with no immediate tax. The $600,000 is now beyond the reach of Opco's trade creditors, and Opco's balance sheet is leaner, helping it stay onside the QSBC active-asset test for a future sale under the LCGE.

Holdco invests the $600,000. Raj does not need the income personally yet, so he leaves it in Holdco and defers the personal tax he would have paid had he drawn it as a dividend. If he later wants to split income, he must clear the section 120.4 TOSI rules first — paying a dividend to, say, his spouse will be caught by TOSI unless an exclusion applies (for example, Raj himself is 65 or older — which lets him split income with his spouse — or the shares are "excluded shares" of a non-services business in which the recipient is 25-plus and owns at least 10% of votes and value). Raj cannot assume sprinkling works; it has to be engineered. See owner-manager compensation for how salary, dividends and Holdco fit together.

When each is the right tool

Choose a freeze when the business is appreciating, you want to hand future growth to the next generation or a trust, you want to cap the gain on your terminal return, and you want to multiply the LCGE across beneficiaries. The trigger is growth you want to redirect.
Choose a Holdco when the business has surplus cash or investments to protect from creditors, you want to defer personal tax on retained earnings, or you need to purify Opco to keep QSBC status. The trigger is assets you want to move or shelter.
Use both when you want the trust's growth shares to be held by, or alongside, a Holdco — so future dividends flow up tax-efficiently and surplus is protected — while the freeze caps your estate exposure. This is the most common mature structure: a freeze done through a section 85 rollover into a new Holdco, with a family trust holding the new common shares. The freeze and the Holdco are two moves in one reorganization, not a fork in the road.

A decision framework

Work through these steps in order before committing to a structure:

Step 1 — Define the objective. Estate-tax capping, creditor protection, income splitting, deferral, or a future sale? Write down the primary goal; the structure follows the goal, not the reverse.
Step 2 — Value the business. A defensible, independent valuation is the foundation. A freeze fixes your preferred shares at fair market value; if that value is wrong, CRA can reassess under the price-adjustment and valuation rules, so the number must hold up.
Step 3 — Test QSBC status. Run the active-asset and holding-period tests. If Opco fails because of surplus cash, purification through a Holdco may need to happen first so the LCGE is available.
Step 4 — Map the family and TOSI. Identify who should receive future value and run each potential recipient through the section 120.4 exclusions. There is no point building a sprinkling structure that TOSI will neutralize.
Step 5 — Choose the mechanism. s.86 for an internal recapitalization, s.85 where a new Holdco is being introduced, s.51 for a simple share conversion under existing terms. The existing share structure usually dictates the answer.
Step 6 — Decide on a trust. A discretionary family trust holds the growth shares, preserves flexibility, and multiplies the LCGE — but it carries the 21-year deemed disposition rule and annual administration, which must be planned for from day one. See post-mortem tax planning for how the freeze interacts with what happens after death.
Step 7 — Document and maintain. Directors' resolutions, share terms, trust deed, and valuations must be executed correctly and kept current. A structure that is not maintained is a structure that fails on audit.

How Barrett Tax Law approaches the freeze-versus-Holdco question

We start from the objective, not the tool. Before recommending any reorganization, we map the existing corporate structure, obtain or review a defensible valuation, test QSBC eligibility, and run each intended beneficiary through the TOSI rules — so the structure we propose actually achieves what you are trying to do rather than looking tidy on paper. Where a freeze and a Holdco belong together, we sequence them as a single reorganization under the appropriate rollover provisions, and we document the share terms, trust deed and resolutions so the structure holds up if CRA reviews it. We also flag the ongoing obligations — the trust's 21-year horizon, the passive-income limits, annual filings — because a reorganization is only as good as its maintenance. Whether you ultimately need an estate freeze, a holding company, or both, the analysis comes first.

If you are weighing these structures for your own business, we offer a free initial consultation to review your situation and outline the options. Contact Barrett Tax Law to arrange one.

Frequently asked questions

Is an estate freeze the same as setting up a holding company?

No. They solve different problems and are frequently used together. An estate freeze is a transaction that caps the value of your shares at today's fair market value — usually by converting common shares to fixed-value preferred shares under section 86, 85 or 51 of the Income Tax Act — so future growth accrues to a family trust or the next generation. A holding company is a structure: a separate corporation that owns the shares of your operating company and is used for creditor protection, tax deferral, and purifying the operating company for the capital gains exemption. A freeze is an event; a Holdco is a vehicle. Many mature plans implement a freeze through a section 85 rollover into a new holding company, with a family trust holding the new growth shares — so it is not an either-or choice but a question of which problem you are solving and in what order.

What is the Lifetime Capital Gains Exemption amount for 2026?

For dispositions of Qualified Small Business Corporation (QSBC) shares in 2026, the Lifetime Capital Gains Exemption is indexed to $1,275,000 per individual. This rose from the $1.25 million figure set by the 2024 federal budget, with indexation resuming in 2026. To use it, the shares must meet the QSBC tests in section 110.6 of the Income Tax Act, including the requirement that substantially all of the corporation's assets be used in an active business and that holding-period conditions be met. A common reason an operating company fails these tests is surplus cash or investments on its balance sheet, which is why owners often move excess assets up to a holding company to purify the operating company before a sale. A discretionary family trust holding the shares can also allow the exemption to be multiplied across several beneficiaries.

Did the capital gains inclusion rate go up to two-thirds?

No. The 2024 federal proposal to raise the capital gains inclusion rate from one-half to two-thirds — on gains above $250,000 for individuals and on all gains for most corporations and trusts — was first deferred to January 1, 2026 and then cancelled by the government in 2025. The rate actually in force in 2026 remains 50%. This matters for structure planning: because the inclusion rate did not increase, the urgency that briefly surrounded capping gains through an estate freeze has eased, but the underlying value of a freeze is unchanged. A freeze still caps the gain that will be deemed to arise on death under subsection 70(5), removes future growth from your terminal return, and lets a family trust multiply the Lifetime Capital Gains Exemption across beneficiaries. Always confirm current rates before acting, as Canadian tax figures change.

Can I split income with family members through a holding company?

Sometimes, but only within the tax on split income (TOSI) rules in section 120.4 of the Income Tax Act, which were tightened in 2018. Simply issuing shares of a holding company to a spouse or adult child and paying them dividends will usually be caught by TOSI, taxing that income at the highest marginal rate and defeating the purpose. Income escapes TOSI only where a specific exclusion applies — for example, the recipient is the business owner's spouse and the owner is over 65, the recipient is aged 25 or over and the shares are 'excluded shares' of a non-services business in which they own at least 10% of votes and value, or the amount is a reasonable return for actual labour or capital contributed. Income splitting through a Holdco therefore has to be deliberately engineered around these exclusions; it cannot be assumed to work.

When should I use both a freeze and a holding company together?

Combining the two is the most common mature structure for an established, appreciating business. You use both when you want to cap your estate-tax exposure on the business and protect surplus assets and defer personal tax at the same time. In practice the reorganization is done as a single set of steps: an estate freeze is implemented through a section 85 rollover into a newly incorporated holding company, your interest is fixed in preferred shares, and a discretionary family trust subscribes for the new growth common shares. Future dividends can then flow from the operating company up through the structure tax-efficiently under the inter-corporate dividend rules in section 112, surplus cash sits protected in the holding company, and the eventual sale gain can be allocated by the trust to multiply the Lifetime Capital Gains Exemption. The freeze and the Holdco are two moves in one reorganization, not competing alternatives.

What are the ongoing obligations after setting up these structures?

A reorganization is only as effective as its maintenance. If a discretionary family trust holds the growth shares, the trust faces a deemed disposition of its capital property every 21 years under the Income Tax Act, which must be planned for well in advance to avoid an unexpected tax bill, and the trust must file annual T3 returns and keep proper records of allocations. A holding company that earns passive investment income is taxed at high corporate rates with a refundable component, and passive income above $50,000 in a year grinds down the small business deduction available to the associated corporate group. Share terms, the trust deed, directors' resolutions and valuations all need to be executed correctly and kept current, because a structure that is poorly documented or left unmaintained is the one most likely to fail when the Canada Revenue Agency reviews it.

Estate Freeze vs. Holding Company: Which Structure, and When