What Is an Estate Freeze? A Guide for Business Owners and Professionals

What is an Estate Freeze?

An estate freeze is a tax planning strategy used to lock in (or “freeze”) the current value of a taxpayer’s interest in a business or other capital property, effectively capping the tax liability that will arise on their death. The future growth in value of the asset is attributed to another person, typically the next generation, often through the use of a family trust or directly to children. This strategy is commonly used in succession planning for owner-managed businesses, allowing wealth to be transferred to the next generation in a tax-efficient manner.

The estate freeze is primarily implemented under section 85 and section 86 of the Income Tax Act (Canada), which allow for tax-deferred rollovers when shares are exchanged or reorganized. Specifically, section 85 allows a taxpayer to transfer property to a corporation in exchange for shares on a tax-deferred basis, while section 86 permits the reorganization of capital whereby common shares are exchanged for preferred shares that have a fixed value, thereby “freezing” the estate of the original shareholder.

Implementing an Estate Freeze Without a Trust

An estate freeze can be implemented without the use of a trust by carrying out a corporate reorganization under the rollover provisions of the Income Tax Act. In a typical structure, the business owner exchanges their growth common shares for fixed-value preferred shares in a tax-deferred transaction, often relying on section 85 or section 86. These preferred shares are usually structured to have a fixed redemption value and may include a fixed dividend rate, with no participation in future growth of the company. This effectively “freezes” the owner’s interest at today’s value.

To shift future growth, new common shares are issued to the next generation, typically adult children, who will benefit from the appreciation in value moving forward. Because capital gains are only taxed when realized, the growth in value of these new common shares can be deferred until a later disposition, often upon the death of the child.

If the business owner wishes to retain control, voting rights can be attached to the preferred shares, while non-voting common shares are issued to the children. Alternatively, control can be maintained by ensuring the preferred shares carry multiple votes per share or represent the majority of the voting power.

This structure locks in the value of the business owner’s interest for tax and probate planning purposes, it allows income splitting with children who are actively involved in the business and over the age of 18 and it may offer a measure of creditor protection by limiting the value of the owner’s retained interest to the fixed-value preferred shares.

Implementing an Estate Freeze Using a Trust

Instead of issuing new common shares directly to the next generation, a business owner may choose to have these shares held by a discretionary family trust. In this structure, the beneficiaries are typically the owner’s adult children, and the trustee who may be the business owner retains discretion over the distribution of income and capital. This provides flexibility for income splitting among beneficiaries in lower tax brackets, optimizing the family’s overall tax position. Importantly, if the business owner acts as trustee, another individual should be named as settlor to prevent attribution rules from applying and taxing income or gains in the hands of the business owner. This approach also offers enhanced asset protection. Since the trust, not the children, holds legal title to the shares, the shares are generally shielded from the children’s creditors and excluded from their estates.

Caution: TOSI Rules and Estate Freezes

When implementing an estate freeze, particularly when income is allocated to family members, it is critical to consider the application of the Tax on Split Income (TOSI) rules under the Income Tax Act. These rules are designed to prevent income splitting with family members who are not actively involved in the business. If TOSI applies, any dividends or other split income received by a specified individual such as an adult child who is not significantly engaged in the business will be taxed at the highest marginal tax rate, eliminating the benefit of income sprinkling. To avoid triggering TOSI, it is important to ensure that beneficiaries of the trust, or direct recipients of common shares, meet one of the exclusions. Failing to plan around these rules can result in adverse tax consequences, undermining the primary goals of the estate freeze. Legal and tax advice should always be obtained before issuing shares or distributing income to family members.

Implementing an Estate Freeze: A Collaborative Effort

Successfully implementing an estate freeze requires close coordination between the client’s corporate lawyer, accountant, and financial advisor. Each professional plays a critical role in ensuring the structure is tax-efficient, legally sound, and aligned with the client’s long-term objectives. The accountant is responsible for valuing the business, assessing tax implications, and preparing necessary filings, while the financial advisor helps align the freeze with broader wealth management and retirement planning goals. The corporate lawyer who must have a solid grasp of corporate law, tax law, and trust law coordinates the legal reorganization, drafts the necessary corporate resolutions and agreements, and advises on trust structuring where applicable. Without an integrated approach, the freeze can fail to achieve its intended benefits or expose the client to unintended tax or legal consequences. Proper planning and execution depend on seamless collaboration between these advisors and a shared understanding of the client’s goals.

When Should You Consider an Estate Freeze?

An estate freeze is most effective when implemented proactively as part of a long-term tax and succession planning strategy. Business owners and high-net-worth individuals should consider a freeze when their corporation or investment portfolio is expected to grow significantly in value. By freezing their interest at current fair market value and transferring future growth to the next generation, they can significantly reduce the tax burden on death and facilitate a smoother intergenerational transfer of wealth.

Estate freezes are particularly beneficial in the following scenarios:

• Approaching retirement: Business owners planning to step back from day-to-day operations may want to lock in the value of their interest and transition future growth to children or other successors.
• Succession planning: A freeze allows a parent to pass future growth to children who are active in the business, while still retaining control through preferred shares.
• Prior to a major liquidity event or value increase: Freezing before a sale, acquisition, or rapid business growth ensures that the tax liability on death is based on today’s value rather than a higher future value.
• Reducing exposure to probate fees and future capital gains: A freeze limits the value of the shares that will be included in the business owner’s estate, reducing both probate fees and capital gains tax on death.

While estate freezes can be powerful tools, they are not one-size-fits-all. The decision to proceed should be guided by a careful analysis of family dynamics, business needs, and personal goals—always with input from legal, tax, and financial professionals.

Common Pitfalls and Mistakes in Estate Freezes

While estate freezes can be highly effective when properly structured, there are several common pitfalls that can compromise the intended tax and succession planning benefits. These mistakes often stem from poor execution, lack of integration between professional advisors, or a misunderstanding of applicable tax rules.

Some of the most frequent issues include:

• Failure to obtain a proper business valuation: The freeze should be based on a reasonable fair market value of the shares being frozen. If CRA later determines the value was understated, the result may be unexpected capital gains or tax reassessments.
• Ignoring the TOSI and attribution rules: Dividending income to family members without considering the Tax on Split Income rules can result in income being taxed at the highest marginal rate. Similarly, if attribution rules apply, the income or gains may be taxed in the hands of the original owner rather than the intended beneficiaries.
• Issuing shares to minors or inappropriate beneficiaries: Transferring growth shares to minor children or individuals not involved in the business can trigger TOSI, limit control, and undermine the effectiveness of the freeze.
• Improper share structure or lack of control planning: Failing to structure preferred and common shares correctly can lead to a loss of control, unwanted tax consequences, or conflicts among shareholders. Voting rights, dividend rights, and redemption rights must all be carefully considered.
• Inadequate documentation: Corporate reorganizations must be properly documented through resolutions, share exchanges, section 85 elections, updated ledgers, and CRA filings. Incomplete or sloppy records can trigger audits and disputes.
• Not aligning the freeze with the estate plan: If wills, powers of attorney, and shareholder agreements are not updated to reflect the new ownership and control structure, the freeze can create confusion or litigation upon death or incapacity.

Avoiding these issues requires close collaboration between the corporate lawyer, accountant, and financial advisor. A properly executed freeze is not just a technical exercise—it’s a strategic planning tool that demands foresight, precision, and ongoing oversight.

How Jahanshahi Law Firm Can Help

At Jahanshahi Business Law Firm, we regularly advise business owners, incorporated professionals, and high-net-worth families on estate freezes as part of a broader succession and tax planning strategy. Our firm offers a unique advantage: we bring together deep experience in corporate reorganizations, trust structuring, and tax planning all under one roof.

We understand that a successful estate freeze is not just about drafting documents. It’s about ensuring that the structure aligns with your personal and financial goals, minimizes tax exposure, and positions your business for a smooth transition to the next generation. We work closely with your accountant and financial advisor to deliver a comprehensive, integrated plan tailored to your needs.

To learn more about whether an estate freeze is right for you or to review your current corporate structure contact Jahanshahi Law Firm today for a consultation.

ABOUT THE AUTHOR:

Shahriar Jahanshahi is a corporate lawyer and founder of Jahanshahi Law Firm, advising startups, growth-stage companies, and investors on complex legal, tax, and strategic matters. His practice focuses on corporate structuring, tax planning, private M&A, franchising, and real estate, with a client base that includes high-net-worth individuals, private lenders, and entrepreneurs. For further information about Shahriar Jahanshahi, click here.

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