Estate Freeze

The freeze in one paragraph

An estate freeze converts the owner's common shares of a corporation into preferred shares with a fixed redemption value equal to the corporation's current fair market value. The corporation then issues new common (growth) shares to the next generation — either directly, or through a family trust. From that day forward, all appreciation of the corporation accrues to the growth shareholders, not the freezor. The original owner's economic interest is "frozen" at today's value.

Why it works

At death, an individual is deemed to have disposed of their property at fair market value under subsection 70(5) of the Income Tax Act. If the business doubles in value over the next 20 years and the owner dies still holding the original common shares, the deemed-disposition gain at death is the full appreciation — taxable to the estate at top capital-gains rates. After a freeze, the owner's deemed-disposition gain is capped at the freeze-day value; the future doubling sits with the growth shareholders, who will eventually pay tax on it at their own time and rate (and often with the benefit of the LCGE).

Three common freeze mechanics

Section 86 freeze. The owner exchanges their common shares for new, frozen-value preferred shares under Section 86. The corporation simultaneously issues new common growth shares to the freeze beneficiaries. The Section 86 conversion is tax-deferred at the freezor's level. Section 86 freezes are the most common single-corporation freeze.

Section 85 freeze. The owner transfers their common shares to a newly-incorporated holding company in exchange for preferred shares of the holdco, electing tax-deferral under Section 85. The growth shares are then issued by the holdco. Used when the structure benefits from a holdco (for example, when there's a future-creditor-protection concern or when the operating company will distribute excess cash to the holdco).

Section 51 freeze. A simpler share-rights conversion when the existing share class can be reorganized through articles-of-amendment plus a Section 51 exchange. Used in narrower situations.

Choosing the growth-share holder

The most flexible structure has the growth shares issued to a family discretionary trust. The trustees (typically the owner plus an independent advisor) decide later — based on circumstances when the time arises — which beneficiaries receive capital gains, dividends, or eventual distributions of the underlying shares. The 21-year deemed-disposition rule means most freezes set up via a trust will have a follow-up event in year 21.

For families where the next-generation owner is already known and active in the business, direct issuance of growth shares to that individual can be simpler. The trade-off is loss of flexibility — once the shares are owned by the individual, they're locked in.

Coordination with the LCGE

An estate freeze can multiply the available Lifetime Capital Gains Exemption across family members. If the growth shares are held by a family trust with multiple beneficiaries (and the SBC and holding-period rules are satisfied), each beneficiary can claim their own $1M+ exemption on their share of the eventual sale gain. For a business expected to sell for $3M-$5M, the multiplied LCGE can shelter most or all of the eventual gain.

Refreezing if values fall

If the corporation's value drops after a freeze (a recession, a lost customer, an industry shift), the original frozen value can become "stuck" higher than the current value. A refreeze — converting the existing preferred shares to new lower-value preferreds and reissuing growth shares at the lower base — resets the freeze to the new value. The refreeze is itself a Section 86 (or Section 85) transaction.

How we work the file

An estate-freeze engagement typically runs: valuation of the corporation, design memo on the proposed structure, drafting of the new share classes in the corporation's articles, Section 85/86/51 elections, trust settlement (if a trust is used), and post-implementation summary. Fixed fees are normal for the design and implementation phases.