Business Succession: Using Estate Freezes and Family Trusts – A Complete Guide by a Montreal CPA Firm Near You

Business succession planning in Canada is one of the most critical yet overlooked
responsibilities of entrepreneurs. Whether transitioning your company to children,
selling to management, preparing for retirement, or planning long-term wealth
preservation, proper succession planning ensures that the business survives—and that
the owner minimizes tax. The most powerful tools in Canadian succession planning are
the estate freeze and the family trust, which allow business owners to lock in today’s
value of their shares, shift future growth to the next generation, reduce future capital
gains tax, and potentially multiply the Lifetime Capital Gains Exemption (LCGE).
Without proper planning, heirs may face large tax bills, disputes, probate delays, and
loss of control. Understanding business succession planning in Canada is essential for
securing your legacy, protecting your family, and minimizing tax.
Legal and Regulatory Framework
Business succession structures rely on multiple sections of the Income Tax Act:

1. Estate Freeze – Section 86 or Section 51 Reorganization
   An estate freeze allows the owner to:
   • convert their common shares into fixed-value preferred shares,
   • lock in today’s fair market value, and
   • issue new growth shares to children, trusts, or successors.
   This limits future tax on the owner and shifts all future growth to the next generation.

2. Family Trust
   A discretionary trust is often used to:
   • hold new growth shares
   • multiply the Lifetime Capital Gains Exemption among family members
   • protect assets from creditors, divorce, or lawsuits
   • allow flexible distribution of dividends
   Trusts are governed by common law principles, provincial trust legislation, and
   attribution rules under sections 74.1 to 75(2).

3. Section 85 Rollover
   Used when transferring assets (such as business assets) into a corporation tax-deferred
   before implementing a freeze.

4. QSBC Tests – LCGE Eligibility
   To multiply the LCGE:
   • shares must meet Qualified Small Business Corporation (QSBC) criteria
   • corporation must pass the 90% active asset test and 24-month holding test
   These rules form the legal structure of business succession planning in Canada.
   Key Court Decisions
   Several major cases shape the rules for estate freezes and family trusts:
   In Neuman v. Canada, the Supreme Court ruled that dividends paid through a trust must
   reflect genuine ownership and not artificial income splitting.
   In Gillard v. The Queen, a failed purification strategy prevented LCGE eligibility, showing
   that business assets must be organized properly long before succession.
   In Kieboom v. Canada, the court examined the validity of share reorganizations and
   emphasized that the value shift must reflect economic substance.
   In Fundy Settlement v. Canada, the Supreme Court determined that trust residency is
   based on the location of control—not where beneficiaries live—affecting tax residency
   planning for family trusts.
   These decisions highlight that freezes and trusts must be implemented carefully and
   legitimately to withstand CRA scrutiny.
   Why CRA Targets This Issue
   CRA carefully audits succession planning because:
   • estate freezes can shift millions of dollars of taxable growth
   • family trusts can multiply the LCGE improperly
   • reorganizations are sometimes used to avoid capital gains
   • attribution rules may apply when transfers are not structured correctly
   • trusts may be taxed in unexpected jurisdictions
   • “value freezes” may be challenged if valuations are unsupported
   CRA focuses on:
   • valuation disputes
   • improper LCGE claims
   • trust residency issues

• attribution of income back to the transferor
• missing or incomplete reorganization documentation
• related-party transactions lacking commercial substance
Because business succession strategies dramatically reduce tax, CRA enforces strict
compliance.
Mackisen Strategy
At Mackisen CPA Montreal, we provide comprehensive succession planning using tax-
efficient structures tailored to each business. Our process includes:
• conducting a full corporate and valuation review to determine fair market value
• implementing a Section 86 or 51 estate freeze at the optimal time
• establishing a family trust to hold growth shares and protect generational wealth
• ensuring QSBC eligibility for the LCGE and performing corporate purification if needed
• preparing legal and tax documents, including share exchange resolutions and rollover
elections
• coordinating with lawyers to complete reorganization steps and minute book updates
• structuring dividend strategies to support retirement while shifting growth to
successors
• planning multi-year transitions to maintain operational continuity
• defending structures in case of CRA review or challenge
Our approach ensures smooth, tax-efficient succession that protects both the business
and the owner’s legacy.
Real Client Experience
A family-owned manufacturing company wanted to transfer the business to their two
children. We performed a valuation, implemented an estate freeze, established a family
trust, and structured dividends to fund the owner’s retirement. The plan saved the family
more than $800,000 in future capital gains tax.
Another client attempted to transfer shares informally without a freeze. CRA challenged
the transaction and denied LCGE eligibility. We restructured the corporation, completed
proper purification, and prepared a compliant freeze for future succession.
A third client had substantial passive assets in their corporation, jeopardizing QSBC
status. We reorganized assets, moved passive investments to a Holdco, and restored
LCGE eligibility for the eventual sale.
These cases show how correct planning can turn a complex succession into a tax-
efficient, orderly transition.
Common Questions

Business owners often ask whether they should freeze early. Freezing too late can
trigger highly taxed gains; freezing too early may limit retirement funds.
Others ask whether family trusts are required. Trusts are not mandatory but offer major
advantages.
Some ask whether LCGE can be multiplied among children. Yes—if shares are held
through a family trust and QSBC rules are met.
Another question: Can an estate freeze be reversed? In certain cases, yes—through a
“thaw” or refreeze, but it must be done carefully.
These questions highlight why business succession planning in Canada must be
customized and carefully executed.
Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps
business owners secure their future through tax-efficient succession strategies.
Whether you are planning an estate freeze, building a family trust, or transferring
ownership to the next generation, our team ensures precision, transparency, and
protection from audit risk.