Estate freeze

How an estate freeze works

The typical structure works as follows:

• The founder exchanges all common shares of Opco for preferred shares with a fixed redemption value equal to the current FMV of Opco
• The exchange is done as a Section 85 or Section 86 rollover, deferring capital gains tax
• New common shares are issued to the next generation (often through a discretionary family trust) at a nominal price
• All future growth of Opco accrues to the new common shares, not the founder's preferred shares
• The founder's preferred shares can be redeemed over time for retirement income, with the redemption price set at the freeze date FMV

Why founders freeze

Estate freezes serve several tax-planning purposes:

• Lock in current capital gains exposure: founder's future tax bill is capped at today's value
• Multiply LCGE access: family trust beneficiaries may each claim the Lifetime Capital Gains Exemption on QSBC shares
• Income split (within TOSI limits): dividends paid to family members at lower tax brackets
• Estate planning: future growth passes to the next generation without triggering deemed disposition on the founder's death
• Asset protection: separating ownership from operations

Section 85 vs Section 86 freezes

Both sections enable the rollover, but with different mechanics. A Section 85 freeze involves the founder transferring assets (or shares) to a new corporation in exchange for preferred shares. A Section 86 freeze restructures the existing share capital within the same corporation — the founder exchanges old common shares for new preferred shares of the same corporation. Section 86 is simpler when no new corporation is needed; Section 85 is used when assets or operations are being transferred across corporations.