How do I plan an estate freeze for my business?

An estate freeze is best planned backwards from the problems it can cause. Before anyone drafts share terms, the owner needs to know who holds shares now, what the articles already allow, who must approve changes and whether the corporation will still qualify for the capital gains deduction afterwards. For the mechanics, see how an estate freeze works.

Map the shareholders and the articles

Start with the register of shareholders and the articles. Under the Canada Business Corporations Act, creating a new class of shares or changing the rights attached to existing shares means amending the articles, which takes a special resolution. Corporations Canada says that resolution is passed at a special meeting. Holders of a class whose rights change are generally entitled to vote separately as a class, and those entitled to that vote can dissent and demand fair value. Where the owner is the only shareholder, there is nobody to vote separately or dissent, so find out early who else is on the register.

Put a documented number on the value

A freeze fixes a number, so the number needs a documented basis. This page does not set out valuation methods. Our answer on valuing a business for a family transfer covers the subject, and a qualified valuator should be engaged before any shares are exchanged.

Decide how the transfer will be elected and filed

When property is transferred to a corporation, the taxpayer and the corporation can jointly elect under subsection 85(1) of the Income Tax Act, using CRA form T2057. Both the owner and the corporation join in it, so the corporation’s approvals and the owner’s timing have to line up. Whether an election is appropriate, and what amounts go on it, is for the accountant to decide.

Test the capital gains deduction before and after

The CRA lists dispositions of qualified small business corporation shares among the gains eligible for the capital gains deduction, and says you generally must meet all of its conditions. Whether the corporation keeps qualifying after the structure changes is a question to put to the accountant before the exchange, and again well before any sale.

What to bring to the first meeting

• The articles, the shareholder register and any shareholders’ agreement.
• Recent financial statements and a list of main assets.
• Your current will, and who you expect to hold the growth shares.