Estate Freezes for Succession Planning – A Complete Guide by a Montreal CPA Firm Near You

Introduction

An estate freeze is one of the most powerful tax-planning tools available to Canadian business owners and high-net-worth families. It allows you to “freeze” the taxable value of your company or assets today and shift all future growth to your children or a family trust. This strategy minimizes taxes on death, supports intergenerational wealth transfer, and prepares your business for succession. While extremely effective, estate freezes involve complex tax rules, valuation issues, share restructuring, and strict CRA compliance. This guide explains how estate freezes work and why they are essential for family businesses and long-term planning.

Legal and Regulatory Framework

Estate freezes rely on provisions of the Income Tax Act governing corporate reorganizations, including sections 85, 86, and 51. In a typical freeze, the business owner exchanges common shares—representing current value plus future growth—for fixed-value preferred shares. New common shares are then issued to children or a discretionary family trust, capturing all future growth. The freeze crystallizes the owner’s capital gain for tax purposes, locking in today’s value and preventing future gains from triggering tax on death. If the family trust is used, trustees can allocate income, dividends, or capital gains to beneficiaries to minimize overall family tax.

Key Court Decisions

In Kieboom v. Canada, the court confirmed that estate freezes must reflect real economic substance and benefit children meaningfully—not simply paper transactions. In Garron Family Trust v. Canada, the Supreme Court emphasized control and mind-and-management rules, highlighting that trusts used in freezes must be properly governed and documented. In Neuman v. The Queen, CRA challenged artificial income splitting through preferred shares, leading to tighter rules around share rights and TOSI considerations. These cases demonstrate the importance of proper structure, documentation, and intention.

Why Estate Freezes Matter

Without an estate freeze, business owners may face substantial capital gains tax at death—often the single largest tax bill their estate will ever encounter. If a company grows from $2 million today to $10 million in 15 years, the tax triggered on the $8 million gain at death could exceed several million dollars. An estate freeze locks in today’s $2 million value, ensuring that only this amount is taxed on death, while future growth accrues to the next generation. This preserves wealth, reduces liquidity pressure at death, and protects the business from forced sale.

How an Estate Freeze Works

Step 1: Value the Business

A fair market valuation is required to determine the current value of your company’s shares.

Step 2: Freeze Shares

You exchange your common shares for fixed-value preferred shares equal to today’s FMV.

Step 3: Issue New Common Shares

New common shares are issued to a family trust or directly to your children. These shares capture all future growth.

Step 4: Plan Income Splitting and Dividends

A family trust allows tax-efficient distribution of income or capital gains to beneficiaries.

Step 5: Implement Long-Term Succession Strategy

Control may remain with the founder by issuing voting preferred shares while passing economic growth to successors.

Benefits of an Estate Freeze

• Minimizes taxes on death by locking in today’s value

• Moves future growth to children or beneficiaries

• Reduces probate fees and estate administration costs

• Provides flexibility through discretionary trusts

• Allows staged succession and business continuity

• Protects assets from divorce, creditors, or mismanagement through trust structures

• Facilitates retirement planning and wealth transfer

Potential Risks and CRA Considerations

Estate freezes must be structured carefully to avoid: attribution rules, TOSI (Tax on Split Income), Section 84.1 anti-surplus stripping rules, unreasonable shareholder benefit assessments, or valuation disputes. If CRA believes the freeze lacked economic substance or was primarily tax-motivated, they may reassess. Documentation, proper share terms, trust governance, and legal compliance are essential.

Advanced Freeze Variations

1. Freeze with a Family Trust

Provides flexibility for allocating income and determining future ownership.

2. Refreeze

If business value declines after a freeze, a “refreeze” updates preferred share values downward to reflect current FMV.

3. Hybrid Estate Freeze

Combines freeze with estate freeze trust and butterfly transactions for complex reorganizations.

4. Freeze into Holding Company

Allows intergenerational income splitting and creditor protection through layered structures.

Mackisen Strategy

At Mackisen CPA Montreal, we design and implement estate freezes that withstand CRA scrutiny. We coordinate valuations, structure share exchanges, collaborate with tax lawyers for reorganization documents, establish family trusts, plan dividend and income allocation strategies, and ensure every tax rule is satisfied. Our approach protects both the business and the family’s long-term tax position.

Real Client Experience

A Montreal business owner froze a $6 million company and shifted future growth to a trust, reducing expected estate tax by over $1.5 million. A family enterprise undergoing succession required a freeze plus refreeze due to market decline—our planning preserved tax efficiency. Another client avoided Section 84.1 penalties during intergenerational business transfer by following a compliant freeze structure.

Common Questions

Does an estate freeze avoid all tax? No—it defers and minimizes tax, not eliminates it. Can I keep control after a freeze? Yes, through voting preferred shares. Can a freeze be undone? Yes—via refreeze or restructuring. Do I need a trust? Not always, but trusts provide major flexibility.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal ensures estate freezes are structured correctly, compliant with CRA rules, and aligned with long-term family, business, and tax planning goals. We protect your legacy and minimize future tax burdens.