How does an estate freeze fix value while keeping control?

A freeze changes who benefits from future growth in the corporation. It does not by itself have to change who runs it, because value and control are set by different parts of the share structure. This page covers control; for the share exchange itself, see how an estate freeze works.

Value sits in the terms of the shares

In the freeze described in our answer on how an estate freeze works, the frozen value is fixed by the rights attached to the owner’s new shares. Where the articles provide for more than one class of shares, both the Canada Business Corporations Act and Ontario’s Business Corporations Act require the rights, privileges, restrictions and conditions attaching to each class to be set out in them, although Ontario’s Act says the one-vote-per-share and remaining-property rights need not be set out. Under the federal Act, articles can be amended by special resolution, subject to sections 176 and 177, to create new classes of shares and to add, change or remove the rights attached to shares.

Control sits in the votes and the board

Both statutes let the articles create more than one class of shares. Each of the basic share rights the statutes list, including the right to vote and the right to receive the remaining property on dissolution, must be attached to at least one class, but they need not all sit in the same class. The directors then manage, or supervise the management of, the business, subject to any unanimous shareholder agreement. An owner can therefore keep control by holding voting shares, by staying on the board, or both, depending on how the articles and any shareholder agreement are written.

Where the growth shares go

The new growth shares may be issued to relatives or to a family trust, and whether they carry votes is a drafting choice in the articles. If they do, who controls that vote matters as much as the owner’s own shares. Our glossary entry on family trusts explains the structure.

What a freeze does not change

The tax steps are separate from control. The CRA says a taxpayer and a Canadian corporation can jointly elect under subsection 85(1) of the Income Tax Act when property is transferred to the corporation, using form T2057. The risk that the frozen value was set too low is separate; see what happens if a freeze undervalues the founder’s shares.