Estate Freeze

When a Canadian business owner dies, the Income Tax Act treats their capital property, including private company shares, as sold at fair market value immediately before death (subsection 70(5)), unless it passes to a spouse or a spousal trust. If the company keeps growing, so does the tax bill the estate inherits.

An estate freeze caps that exposure. The owner, called the freezor, exchanges their common shares for preferred shares with a fixed value equal to what the company is worth today. New common shares, issued for a nominal price, go to the people who will own the future. Every dollar of growth after the freeze date accrues to those new common shares, not to the freezor's estate.

A freeze is not a sale. The freezor receives no cash, keeps the frozen value, can keep voting control, and can draw income through dividends on, or redemptions of, the preferred shares. It is often the first step toward a later intergenerational business transfer or another succession route, such as the employee ownership trust option now available to Canadian owners.

Freeze shares are preferred shares designed so their value stays fixed at the freeze-date value. Typical terms:

• A fixed redemption and retraction amount equal to the fair market value of the common shares given up, so the company can redeem them, and the holder can require redemption, at that price.
• Priority over the common shares on a wind-up, up to the redemption amount.
• No participation in growth, and a dividend that is capped and usually discretionary and non-cumulative.
• Voting rights, where the freezor wants to keep control while the growth goes to others.
• A price adjustment clause that changes the redemption amount if the CRA or a court finds a different value. The CRA's Income Tax Folio S4-F3-C1 recognizes such a clause only if, among other conditions, the parties genuinely tried to transfer at fair market value and actually make the adjustment.

The corporation's articles must authorize the freeze shares. If they do not, an Ontario corporation files articles of amendment under section 168 of the Business Corporations Act (OBCA), approved by special resolution. Companies set up with a flexible share structure often already have a suitable class. A business valuation report from a Chartered Business Valuator supports the redemption amount.

Two provisions of the Income Tax Act let the exchange happen without immediate tax.

Section 86 applies only where the owner disposes of all of their shares of the class, and it does not apply if a section 85 election is filed for the same shares. A section 85 rollover gives more control because the parties choose the elected amount, which lets an owner of qualifying shares trigger a gain sheltered by the lifetime capital gains exemption at the same time as freezing.

In a holding company freeze, the owner rolls operating company shares into a holdco for holdco preferred shares, and the next generation or a family trust subscribes for new common shares, usually of the holdco, so that future growth in the operating company accrues to them. Taking cash or a note as part of that exchange can trigger section 84.1 and a deemed dividend, so holdco freezes are normally share-for-share.

The new common shares can be issued to:

• Adult children directly. This is simple, but it fixes who benefits on day one and gives the children shares that can be affected by their own creditors, disputes or marriage breakdown.
• A discretionary family trust. Trustees decide later which family members benefit. The trust is a separate taxpayer that usually must file an annual T3 return and is generally deemed to dispose of its capital property every 21 years, so a trust freeze needs a long-range plan. It is very different from a bare trust, where the trustee only holds title.
• A holding company owned by the next generation.
• Key employees, sometimes alongside an option plan.

Subscribers should pay the nominal subscription price with funds that did not come from the freezor. Money gifted or lent by the freezor can bring the income attribution rules into play.

• Valuation. If the freeze shares are worth less than the shares given up and the difference benefits a related person, subsection 86(2) or paragraph 85(1)(e.2) creates an immediate gain. Undervaluing to shift more growth defeats the plan.
• Tax on split income. Dividends on growth shares paid to family members can be taxed at the top marginal rate under the TOSI rules unless an exclusion applies, such as active involvement in the business.
• Corporate attribution. Where one of the main purposes of a freeze is to benefit a spouse, or a minor child, grandchild, niece or nephew, and the corporation is not a small business corporation, section 74.4 can deem the freezor to receive interest income each year at the prescribed rate.
• Retirement income. The freezor's wealth from the company is capped at the frozen value. Owners who will need more may freeze only part of their shares.
• Control and exit terms. A shareholder agreement among the next-generation owners should cover transfers, buyouts and what happens if a child leaves the business.

As of October 2026, the capital gains inclusion rate remains one-half; the increase proposed in 2024 was cancelled in March 2025.

Gordon Pereira, 61, owns all 100 common shares of Pereira Fabrication Ltd., an Oakville metal fabrication company. In March 2026 a Chartered Business Valuator values the company at $4,000,000. His daughter Alicia runs operations and his son Marco manages sales; both expect to own the business one day.

Using section 86, the company amends its articles to create voting preferred shares redeemable and retractable at $1 each, and Gordon exchanges his 100 common shares for 4,000,000 of them, with a price adjustment clause. A newly settled discretionary family trust, with Alicia, Marco and Gordon's grandchildren as beneficiaries, subscribes for 100 new common shares at $1 each, using funds that did not come from Gordon. Some grandchildren are minors, but because the company is a Canadian-controlled private corporation with substantially all its assets used in its active business, it is a small business corporation and the corporate attribution rule does not apply while that remains true.

By 2036 the company is worth $7,000,000. The $3,000,000 of growth belongs to the common shares held by the trust, not to Gordon. His preferred shares are still worth no more than $4,000,000, less any he has redeemed to fund his retirement, so his estate's deemed disposition for this company is capped at that amount. Gordon keeps voting control throughout, and the trustees can later distribute the common shares to whichever children are running the business, well before the trust's 21-year deemed disposition date.