Estate Freeze and Family Succession Planning

Introduction
Understanding estate freeze and family succession planning is essential for business owners, family enterprises, real estate investors, corporate shareholders, and anyone looking to transfer wealth to the next generation with minimal tax. An estate freeze locks in today’s value of a business or asset, allowing future growth to pass to children or a family trust. This reduces future capital-gains tax and ensures a smooth transfer of ownership. Estate freezes are one of the most powerful tax-planning tools in Canada, but must be executed correctly to comply with CRA and Revenu Québec rules. This guide explains how estate freezes work, how families benefit, and the strategies needed for a successful succession plan.

Legal and Regulatory Framework
Estate freeze and family succession planning is governed by the Income Tax Act, section 86 corporate reorganizations, section 51 share exchanges, section 85 rollovers, capital-gains rules, attribution rules, the 21-year trust rule, CRA corporate reorganization requirements, the Québec Taxation Act, and succession rules under Québec’s Civil Code. Proper legal and CPA coordination is mandatory for a compliant freeze.

What Is an Estate Freeze?
An estate freeze is a corporate reorganization in which a business owner exchanges common shares (which grow in value) for fixed-value preferred shares. New common shares are then issued to children or a family trust at a nominal value.
This locks in the current value for the owner and shifts all future growth to the next generation.

Why Perform an Estate Freeze?
Estate freezes are used to:
reduce future capital-gains taxes
facilitate family business succession
transfer wealth gradually
control how and when children inherit
protect assets from family law claims
prepare for retirement
freeze business value before selling
Estate freezes protect families from large tax burdens at death.

How an Estate Freeze Works
A typical freeze involves the following steps:
the owner exchanges common shares for fixed-value preferred shares
the company issues new common shares to a family trust or children
preferred shares retain voting control (if desired)
new common shares capture all future business growth
The freeze must follow strict valuation and documentation rules.

Preferred Shares in an Estate Freeze
Preferred shares represent the frozen value. They may include:
fixed redemption value
fixed dividend rights
voting rights (optional)
The owner maintains control while freezing taxable growth.

Role of the Family Trust
A family trust is often used to hold new common shares. Benefits include:
flexibility in choosing beneficiaries
protection from divorce or creditors
income splitting opportunities (within TOSI rules)
21-year planning
multi-generation succession
Trusts are central to successful long-term freezes.

Valuation Requirements
The fair market value of the company must be established before freezing. CRA requires:
proper business valuation
supporting financial documentation
avoidance of undervaluation or overvaluation
Valuation errors can trigger reassessments and penalties.

Section 86 and Section 51 Reorganizations
These sections allow share exchanges without triggering immediate tax.
Section 86 applies to exchanging one class of shares for another.
Section 51 applies to converting convertible securities.
Section 85 is used when transferring assets into a corporation before freezing.

Estate Freeze for Real Estate Investors
Real estate corporations can also be frozen. This shifts future property appreciation to the next generation. A freeze prevents estate tax shocks when passing down real estate portfolios.

Estate Freeze for Operating Businesses
Entrepreneurs use freezes to:
pass business control gradually
protect the next generation
prepare the business for sale
reduce tax upon death
A freeze locks in owner value and ensures smooth succession.

Family Succession Planning Considerations

Choosing the Right Successors
Family succession is not only a tax matter — it requires evaluating children’s:
skills
interest
capacity
leadership ability
Financial planning must align with family dynamics.

Management vs Ownership
Estate freezes allow separating ownership from management. Children may own the company through a trust even if management remains with the founder initially.

Equalizing the Estate
Children active in the business receive ownership; inactive children may receive life-insurance proceeds or non-business assets. This prevents future disputes.

Governance Structures
Family charters, shareholder agreements, and voting rules ensure stability. Proper governance prevents conflict and protects family legacy.

Tax Benefits of an Estate Freeze
major reduction in future capital-gains tax
transfer of future wealth to next generation
use of the Lifetime Capital Gains Exemption (LCGE)
ability to multiply LCGE across multiple beneficiaries
protection from TOSI rules when structured correctly
Estate freezes strategically reduce long-term taxes.

The 21-Year Trust Rule
Trusts must address the 21-year deemed disposition rule. Before year 21, assets must be:
distributed to beneficiaries
transferred to a new structure
Otherwise, the trust triggers capital gains tax. Freeze planning must consider the trust’s timeline.

Avoiding Attribution Rules
Improperly structured freezes may trigger attribution, sending income back to the original owner. Proper documentation prevents this.

Estate Freezes and Corporate-Owned Life Insurance
Life insurance is often integrated into estate freezes:
funds taxes at death
supports share redemption
creates liquidity
credits the CDA for tax-free dividends
This ensures the company does not face cash shortages when shares transfer.

Québec-Specific Succession Rules
Québec’s Civil Code affects inheritance structures:
family patrimony
matrimonial regimes
succession pathways
notarial wills
Québec succession law must be coordinated with corporate freeze planning.

Common Mistakes in Estate Freezes
undervaluing shares
issuing new shares incorrectly
not implementing a family trust
ignoring TOSI rules
inadequate documentation
not planning for the 21-year rule
mixing personal and corporate funds
These mistakes often trigger CRA reassessments.

Key Court and CRA Positions
CRA and courts uphold estate freezes when properly structured but challenge those with:
inaccurate valuations
sham transactions
lack of legal agreements
improper governance
Courts also enforce TOSI, attribution rules, and trust rules strictly.

Why CRA and Revenu Québec Audit Freeze Transactions
major wealth transfer events
suspicious valuations
trust distributions
CDA calculations
corporate reorganizations
Estate freezes attract audit scrutiny because of the tax reduction impact.

Mackisen Strategy
Mackisen CPA designs, structures, and implements estate freeze and family succession planning. We coordinate valuation, share restructuring, family trusts, documentation, governance planning, corporate-owned life insurance, and CRA/ARQ compliance. Our strategies protect family wealth and ensure smooth multi-generational transfers.

Real Client Experience
A Montréal business owner froze shares at $2 million; Mackisen structured the family trust and optimized TOSI exemptions. A real estate investor transferred future growth to children while maintaining control; we implemented a compliant freeze. A family manufacturing business faced succession conflict; Mackisen built a governance plan and freeze structure. A professional corporation needed estate equalization; we integrated COLI and freeze planning.

Common Questions
Is an estate freeze legal? Yes — when properly structured.
Does an estate freeze reduce taxes? Significantly.
Do I need a family trust? Highly recommended for flexibility.
What if the business grows rapidly later? Growth belongs to beneficiaries.
Can a freeze help with business succession? It is the cornerstone tool.

Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps families implement estate freeze and family succession planning to protect wealth, reduce tax, and secure the next generation’s future. Our expert team ensures valuation accuracy, compliance, and strategic multi-generational planning.