How to Perform an Estate Freeze: Locking in Value and Passing Future Growth to Heirs — CPA Firm Near You, Montreal

Introduction

An estate freeze is one of the most powerful tax planning tools available to Quebec business owners and families with growing assets. It allows you to “lock in” the current value of your business or investments and pass future growth to the next generation, often through a holding company or family trust. Estate freezes reduce future tax liability, protect wealth, and create a clear succession plan. This guide explains how an estate freeze works, why it matters, and how a CPA near you in Montreal can help implement it correctly.

Legal and Regulatory Framework

Under the Income Tax Act, an estate freeze typically involves exchanging the owner’s common shares for fixed-value preferred shares and issuing new common shares to heirs, a holding company, or a family trust. The preferred shares represent today’s locked-in value, while new common shares capture all future growth. Estate freezes must be documented with share exchange agreements, resolutions, corporate reorganizations, and updated minute books. Section 85 or 86 of the Income Tax Act is often used to roll assets into a new structure without triggering immediate tax. CRA requires fair market value assessments, proper share classes, and accurate documentation.

Key Court Decisions

Courts have ruled that estate freezes must reflect economic reality. Judges have denied freeze transactions where valuations were inaccurate, where documentation was incomplete, or where the freeze lacked commercial purpose. Some decisions confirmed that improperly implemented freezes triggered capital gains or shareholder benefit assessments. Courts emphasize that estate freezes must follow strict corporate and tax rules to be valid.

Why CRA and Revenu Québec Scrutinize Estate Freezes

Estate freezes involve subjective valuations, related-party transactions, complex reorganizations, and long-term tax deferral. CRA examines whether the freeze reflects fair market value, whether documentation supports the freeze, whether family trusts are used properly, whether beneficiaries are subject to Tax on Split Income (TOSI), and whether shares were issued correctly. Revenu Québec reviews share attributes, resolutions, and compliance with the QBCA/CBCA. Errors increase audit risk significantly.

What an Estate Freeze Achieves

Locks in today’s value

Your future taxable gain is capped at the time of the freeze.

Transfers future growth

Future appreciation is shifted to children, heirs, or a family trust.

Reduces estate tax

By capping growth, your tax burden on death is lower.

Facilitates business succession

Provides a clear plan for transferring ownership gradually.

Creates planning flexibility

Family trusts can allocate income or capital gains strategically.

Helps protect assets

Future assets grow outside your personal estate, reducing creditor exposure.

How to Perform an Estate Freeze: Step-by-Step

Step 1: Valuation

A CPA assesses the fair market value of the business or assets.

Step 2: Create or update share structure

Preferred shares are issued to the owner; new common shares go to heirs or a trust.

Step 3: Share exchange

The owner exchanges common shares for preferred shares, often using Section 85 or 86.

Step 4: Issue new growth shares

Family members or a trust receive common shares for future growth.

Step 5: Update corporate records

Minute books, share registers, and resolutions must document the freeze.

Step 6: Integrate a family trust (optional)

A trust allows flexible distribution of growth among multiple beneficiaries.

Step 7: Implement long-term tax planning

Managing dividends, shareholder loans, and passive income is critical after the freeze.

Common Pitfalls

Incorrect valuations

Understating or overstating value creates tax risk.

Missing documentation

Without proper records, CRA can reverse the freeze.

TOSI issues

Dividends or gains allocated to family members may be taxed at punitive rates.

Passive income problems

Holdings with excessive passive income may reduce the Small Business Deduction.

Improper use of preferred shares

Attributes must match tax rules to avoid reassessments.

Mackisen Strategy

At Mackisen CPA Montreal, we design and execute estate freezes with precise valuations, correct share structures, proper elections under Section 85 or 86, updated minute books, and integration with holding companies or family trusts. We coordinate with lawyers to ensure corporate records and trust deeds meet all legal requirements. Our strategies reduce long-term tax, protect assets, and ensure a smooth generational transition.

Real Client Experience

A Montreal business owner implemented an estate freeze incorrectly, using vague valuations. CRA reassessed significant gains. We rebuilt the freeze, filed proper elections, and corrected share attributes. Another client used a family trust to hold new common shares, allowing tax-efficient income allocation among children as the business grew.

Common Questions

When should I consider an estate freeze?

When your business or investments have grown significantly and future growth is expected.

Do I need a family trust?

Not always, but it provides flexibility.

Is an estate freeze reversible?

Yes, but only through a thaw or refreeze.

Does a freeze save tax immediately?

No, it caps future tax, not current tax.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal performs estate freezes that reduce long-term tax, protect family wealth, and prepare businesses for succession. We ensure compliance, precision, and strategic outcomes tailored to your legacy goals.