What Is an Estate Freeze?
An estate freeze is a corporate reorganization under Section 86 or Section 85 of the Income Tax Act that converts your existing common shares (which continue to appreciate) into fixed-value preferred shares. New common shares — which capture all future growth — are issued to the next generation or a family trust. The result: your tax liability at death is capped at today's value, while all future appreciation accrues to your heirs without passing through your estate.
For a business owner whose corporation is currently worth $2 million but expected to grow to $5 million by retirement, an estate freeze today saves the family approximately $700,000 to $900,000 in taxes that would otherwise be payable at death on the $3 million of growth.
When to Consider an Estate Freeze
The ideal time for an estate freeze is when your business has significant future growth potential, you have identified successors (children, key employees, or a family trust), and you want to begin the process of transferring wealth while maintaining control. Most professionals implement estate freezes between ages 45 and 60.
How an Estate Freeze Works
| Step | Action | Result |
|---|---|---|
| 1 | Exchange common shares for preferred shares | Your shares are now fixed at current fair market value |
| 2 | New common shares issued to next generation/trust | All future growth accrues to new shareholders |
| 3 | Preferred shares retain voting rights and dividends | You maintain control of the corporation |
| 4 | At death, only preferred share value is taxed | Growth transferred tax-efficiently to heirs |
Section 86 vs. Section 85 Freeze
A Section 86 freeze is simpler — it involves a straightforward share exchange where you surrender common shares and receive preferred shares of equal value. No election is filed. A Section 85 freeze involves a transfer to a new corporation and requires filing an election, but offers more flexibility in structuring the transaction, particularly when multiple shareholders are involved or when the freeze is partial.
The choice between these methods depends on your corporate structure, the number of shareholders, whether you want a full or partial freeze, and specific tax planning objectives. SG Wealth Management coordinates with your tax accountant and legal counsel to determine the optimal approach.
Maintaining Control After the Freeze
A common concern is losing control of the business after an estate freeze. In practice, the preferred shares issued to you typically carry full voting rights, allowing you to maintain complete control over corporate decisions. You can also structure dividend rights on the preferred shares to continue receiving income from the corporation. The new common shareholders (your children or trust) hold growth shares but have no voting power until you choose to transfer it.
Integration with Other Estate Planning Strategies
An estate freeze works most effectively when combined with other strategies: corporate-owned life insurance to fund the eventual tax on preferred shares, a family trust to hold the new common shares (providing flexibility in allocation among children), and the lifetime capital gains exemption to shelter up to $1,016,836 per qualifying family member when shares are eventually sold.