Estate Freeze

An estate freeze is a tax and succession planning strategy in which a business owner exchanges their common shares for fixed-value preferred shares, transferring all future growth in the business's value to the next generation (or a family trust). At the time of the freeze, the owner crystallizes the current value of the business and locks in their capital gains tax exposure at that point.

After the freeze, the children or a family trust subscribe for new common shares at nominal value. All future appreciation in the business's value accrues to the common shares, not the owner's preferred shares — deferring tax on that future growth until the next generation eventually sells.

Section 85 of the Income Tax Act is the technical mechanism underlying most estate freezes: the owner rolls existing shares into a holding corporation on a tax-deferred basis, electing a transfer price that defers the capital gain. An estate freeze does not eliminate the tax liability — it defers recognition until the preferred shares are redeemed, sold, or deemed disposed of at death.

See also: Section 85 Rollover, LCGE, QSBC, Capital Dividend Account, Family Trust.