How does an estate freeze work for a corporation?

An estate freeze fixes the value of an owner’s stake in a corporation at today’s figure so that growth after that date accrues to someone else. Law-firm guidance describes it as a common succession-planning technique. It changes who owns the future increase in value. It does not by itself sell the business or remove the owner from it.

The share exchange

The owner typically exchanges their common shares for preferred shares fixed at today’s value. New common shares, which capture all future growth, are issued at a nominal value to a spouse, children or a family trust. The owner can often keep control or income rights, since the aim is to freeze the value of the stake rather than hand over the business. For a related term, see family trust.

What the corporate statute has to allow

The new classes must exist in the corporation’s articles. Under the Canada Business Corporations Act, articles can be amended by special resolution to create new classes of shares and to change the rights attached to shares. A corporation may redeem redeemable shares at prices not exceeding the redemption price stated in the articles or calculated by a formula stated there, but not where there are reasonable grounds to believe it is, or after the payment would be, unable to pay its liabilities as they become due, or that the realizable value of its assets would fall below its liabilities and the amounts owed to holders of shares ranking ahead of or equally with the shares redeemed. Provincial statutes, such as Ontario’s Business Corporations Act, contain parallel amendment provisions.

The tax side

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 CRA form T2057. Our answer on section 85 rollovers explains the election. The CRA lists dispositions of qualified small business corporation shares among the gains eligible for the capital gains deduction. The law-firm guidance cited here says the exemption does not turn on share class, so preferred shares from a freeze can qualify if the corporation and holding tests are met. A holding company, a family trust holding the growth shares or a freeze completed years ago can complicate eligibility, so test it against current facts.