Canadian Tax Law: 4. What is an estate freeze and how can you use it to help you?

Estate Freezes Help Business Owners and Their Successors

You can avoid a significant tax bill by using an estate freeze when you transfer partial or full ownership of your company to successors.

Estate freezing helps you issue new shares, defer tax to your successors, or simply extract cash from your company with minimal tax consequences.

How Estate Freezes Work

An estate freeze happens when you lock in or “freeze” the value of your company into preferred shares.

When you freeze your estate, you effectively bring your company’s value down to zero. You can then issue common shares to your successors (or to yourself) for a nominal cost.

The new common shares operate as growth shares that accrue value from the date of the freeze onward.

·        If the company value declines after the freeze, the growth shares hold no value and thus have no tax consequences.

·        If the company value increases after the freeze date, shareholders are liable to pay capital gains on the accrued difference.

The Tax Benefits of Freezing Your Estate

Freezing the value of your company and issuing common shares to your successors can help you to achieve a number of tax planning outcomes.

Withdraw Cash

The value of the company attaches to the preferred shares, which can be redeemed to extract money from the company.

Defer Tax Liabilities to Your Successors

Estate freezing allows you to defer income to later years when the growth shareholders cash out their shares. If those shareholders happen to be in a lower tax bracket when they divest, they’ll face a smaller tax bill.

Growth Shareholders Accrue Fewer Capital Gains

Your successors receive common shares that benefit from the company’s ongoing growth. They are only subject to capital gains that accrue from the date of the freeze onward.

Without an estate freeze, your successors become liable for the increase in value from the date of incorporation until the date they sell their shares.

The Corporate Restructuring Benefits of Freezing your Estate

Estate freezes help business owners plan a smooth succession. You pass ownership of the common shares to your successors but still retain a stake in your company by acquiring preferred shares.

If you want to continue managing your company, you can execute the freeze to preserve the voting rights you had as a common shareholder.

You can even guarantee yourself a seat on the board of directors.

Thinking Ahead:

The estate freeze is a common tax and succession-planning mechanism that allows for creative solutions. We can custom-tailor an estate freeze plan for you that addresses some or all of your goals.

Whether you need to extract some funds from your company, retain some common shares, or pass the entire company to your successors while guiding the corporation you built, Du Plooy Law can make it happen.

As of the date of publication, the contents of this article are believed to be accurate and reliable; however, tax laws are complex and subject to change at least on an annual basis. Before implementing any tax or succession plan, you should always consult professional legal and accounting advice. This article is to inform only and is not to be construed as legal advice. Du Plooy Law does not accept any liability for the tax consequences that may result from actions made based on the contents of this article.