How Does an Estate Freeze Work Under the Canadian Income Tax Act?
The classic structure uses a section 86 share-for-share exchange within the same corporation, or a section 85 rollover into a new holding company. The owner receives preferred shares with a fixed redemption value equal to the company's current fair market value, supported by a defensible valuation. New common shares of nominal value are issued to a discretionary family trust whose beneficiaries are the owner's spouse, children, and grandchildren.
What Creditor Protection Does an Estate Freeze Provide?
From the freeze date forward, all business growth belongs to the family trust, not to the owner personally. A judgment against the owner can reach only the preferred shares capped at the freeze value, not the new common shares held by the trust. Combined with a discretionary trust structure, the post-freeze growth is doubly insulated: it sits in a trust whose beneficiaries have no fixed interest.
What Tax Implications Should a Canadian Business Owner Consider Before an Estate Freeze?
The freeze itself is a tax-deferred event when properly executed. The owner crystallizes the accrued gain to the freeze value, which is realized only on later redemption or deemed disposition at death. CRA may reassess if the freeze value is artificially low under section 69 or invoke the general anti-avoidance rule if structured aggressively. Independent valuation and section 85 election filings are essential.
Key Takeaways+
- An estate freeze caps personal creditor exposure to the business at today's value.
- Section 86 or section 85 of the Income Tax Act provides the tax-deferred mechanism.
- All future growth accrues to a family trust beyond the owner's creditor reach.
- Defensible valuation and proper filings are mandatory to withstand CRA review.
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