Does an old estate freeze still hold up if I sell my business now?

An estate freeze is not a one-time event that fades. The share terms it created stay in the corporation’s articles until the corporation amends them, and under the Canada Business Corporations Act an amendment that creates new classes or changes share rights needs a special resolution, subject to sections 176 and 177. When you sell, the buyer deals with the classes that exist today.

Both classes of shares are in play

In the freeze described in our answer on how an estate freeze works, the founder holds preferred shares fixed at an earlier value and new growth shares are held by others, such as family members or a trust. A buyer who wants all of the shares needs each holder to agree to sell. Each holder also has their own tax position under the Income Tax Act, so the sale is planned holder by holder.

The capital gains tests apply on the day of sale

Whether a holder can claim the capital gains deduction depends on the Income Tax Act’s definition of a qualified small business corporation share, tested at the time of sale. Among other things, throughout the 24 months before, the shares must not have been owned by anyone other than the individual or a person or partnership related to the individual. For that test, subsection 110.6(14) deems shares a corporation issued to a person after June 13, 1988 to have been owned, just before their issue, by a person not related to that person, unless they were issued as consideration for other shares, as part of a transfer to the corporation of all or substantially all the assets used in an active business carried on by that person (or of a qualifying partnership interest), or as a stock dividend. Throughout the part of that period when the individual or such a related person owned them, the corporation must have been a Canadian-controlled private corporation with most of the fair market value of its assets attributable to assets used principally in an active business carried on primarily in Canada by it or a related corporation, to certain shares and debt of connected corporations, or to both. The definition is framed around a share of the capital stock of a corporation that meets those tests, not around a class of share.

Older freezes and recent changes

The Act has a specific rule for a share substituted for another within the 24 months before the sale: the new share is treated as meeting the definition only if the share it replaced met the ownership and asset tests for the period up to the substitution. A freeze completed years ago sits outside that window, but a recent restructuring may not. Where a family trust holds growth shares, the CRA lists a trust’s allocation and designation of taxable capital gains from qualified small business corporation shares among the gains the deduction can apply to. If the original value may have been set too low, see what happens if a freeze undervalues the founder’s shares.