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| Jason Moore |
In a nutshell, an estate freeze allows a business owner to “lock in” the value of their shares as of the date that the estate freeze is executed and pass on the business’ growth in value to shares held by people other than the business owner, such as their children. When the business owner dies and their shares are deemed to be disposed of pursuant to the Income Tax Act, the value of those shares is calculated as of the date of the estate freeze, instead of the (presumably) higher value as of the business owner’s date of death.
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- A business owner wants her children to inherit her business in several years’ time. She exchanges her existing common shares in the business for “fixed-value preferred shares.” The value of these shares is frozen at their then-current value and does not increase in value as the business grows. These shares have voting rights, so she can retain primary control over her business.
- The business issues new common shares to her children, often using a family trust. These shares do increase in value as the business grows. These shares usually have less voting power than the business owner’s fixed-value preferred shares.
- Years later, when the business owner dies, she is deemed to have disposed of (i.e., sold) her fixed-value preferred shares in her business. The time of disposition is her death, but the value of the shares has not changed since the date of the estate freeze. The business owner’s children continue to own their common shares. The business owner’s shares get distributed according to her will.
Assuming the business has grown since the estate freeze, the disposition of the frozen shares will attract less capital gains tax on death than if there had been no freeze. Additionally, a certificate of appointment of an estate trustee is not necessarily required to transfer the business to the children. This will save the estate both time and money.
Estate freezes are often combined with other tax and estate planning tools, such as a trust or a holding company. When done correctly, these tools can work together to further reduce tax liabilities for an estate and minimize financial strain on the business and its new owners. It allows more money to stay in the family.
There are numerous operational, legal, and personal considerations a business owner must account for when executing an estate freeze. In addition, there are numerous business and long-term financial planning issues that arise whenever a business is restructured. Strain may arise, for example, as children inherit valuable shares in a company they cannot control or even access (if a trust is used). Therefore, it is important to be transparent and set the parties’ expectations correctly.
Planning and executing an estate freeze, though often fiscally rewarding, is a complex and nuanced process that requires knowledge of the applicable laws and processes. For those who deal with these issues or who are interested in them, there is a lunch and learn seminar on this topic which will feature Raquel Levine, Howard Zerker and Denise Batac on Oct. 29, 2024, starting at 12 p.m. This seminar is an opportunity for new and experienced estate and family lawyers to learn about this rapidly evolving area of trusts and family law. For more information and to register, please access this link.
Jason Moore is a lawyer at Wagner Sidlofsky LLP, practicing in the estate and commercial litigation groups.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the author’s firm, its clients, LexisNexis Canada, Law360 Canada or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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