The Estate Freeze is a great tax planning tool. It is a common business succession tool used to defer taxes. The Estate Freeze transfers the future increase in value of assets to other people.  These are most often children or family members of the transferor.

In a freeze transaction, the transferor retains the current value of their shares.  All future gains becomes the property of the children and the tax on those gains is only paid when the children sell their shares.  Otherwise without the freeze, capital gains tax would be payable upon the death of the transferor.

In a nutshell, an estate freeze works as follows:  It converts a taxpayer’s shares in their business into preferred shares with value equal to the value of the shares they traded in. There is no immediate tax consequence. After the estate freeze the taxpayer is left with preferred shares that will never increase in value.

The corporation then issues a few new common shares worth $1 to family members or a family trust. The recipients pay $1 for shares that are worth $1 and there is no taxable event at that point.  And as the business and its assets increase in value over time, that increase is attributed to the common shares owned by the next generation, which at the time of the freeze were only worth, say, $1, but which could turn out to be worth millions of dollars down the road. And voilà, tax on any further increase in value of the business is paid by the next generation many years in the future when they sell the $1 shares that were given to them — and not by the taxpayer who had frozen their estate.

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