What is an estate freeze? What are the benefits?

Estate freezes can be a useful tool for tax planning to reduce future taxes on a business. When done correctly, an estate freeze can help Canadian business owners and managers lower the tax they pay on capital gains in the future, reduce the probate fees on their shares upon death and provide a tax-efficient way for them to transfer ownership of the business to the next generation. This video outlines some of the reasons you may want to explore this option.

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Video transcript

An estate freeze allows for estate planning by helping the business pass to the next generation in a tax-efficient manner. There are various methods of implementing an estate freeze and different possible structures. Here are some reasons why someone may explore this option. 

To minimize future taxes

An estate freeze essentially defers the taxes payable on the future growth of the business until your family members dispose of their shares in the corporation. 

To transfer risk to future owners

In most cases, any estate freeze converts the owner’s shares from common to preferred shares, and future successors receive common shares. If a company goes into liquidation, the first shares paid out are preferred, which means the current owner will have less risk. 

To lock in the future price of the business

This allows the current owner to set the price that future owners will have to pay for the business. 

To provide retirement income 

An estate freeze could allow the successors to buy the owner out over time and provide the owner with retirement income.

To create a smooth transition

By locking in the price and securing a commitment to the business’s long-term success, successors will be able to plan for the future.

To take advantage of income-splitting opportunities

An owner can split income with their children as a result of an estate freeze without violating the attribution rules.

Who is an estate freeze for? 

An estate freeze typically appeals to business owners whose retirement is approaching but not yet imminent. These owners typically have children or key employees who are obvious successors. 

It’s important to note that an estate freeze is a long-term strategy. Consideration of the potential changes in tax laws and regulations that may occur over time is important. Professional advice is needed in order to weigh the pros and cons of an estate freeze.