A small business owner thinks of the present and future. Depending on how you see your business, you plan everything from how to grow it today to how it will fund your retirement and take care of your family after you. That is where estate planning comes in, and a tax-efficient way of transferring your estate to your children or employees is through an estate freeze. When you feel it is time to switch from being an active member to a passive member of the business, you can freeze your assets. 

How To Freeze Your Estate? 

Under Canadian tax law, your assets are deemed to be sold to your beneficiary at fair market value just before your death. The deemed sale incurs capital gain tax liability on the beneficiary unless it is the spouse. Estate freeze allows you to minimize this tax liability arising after death. 

To freeze your estate, you transfer your common shares to the business in return for an equal amount of fixed-value preference shares that pay dividends. By doing so, the value of your shares freezes, and you earn preferred dividends on which you pay tax as and when you withdraw it. Depending on your financial requirement, you can also sell preference shares back to the company over time. It reduces your assets and, therefore, the tax liability upon death. 

And your operating company can issue new shares to your beneficiaries without triggering an immediate tax liability. The capital gain tax is deferred until the new shareholders sell their shares. 

Key Considerations For An Estate Freeze

A poorly planned estate freeze could lead to unwanted tax bills. Discuss the following considerations with a skilled wealth advisor before pursuing a complex estate freeze. 

Consider the Valuation of Shares 

The critical aspect of an estate freeze is the value at which you freeze your assets/shares. Consider the valuation of shares from a long-term perspective; is the value sufficient to fund your lifestyle post-retirement? Your share valuation cannot be too high to impact your business, nor can it be too low to leave you with little money for retirement.  

Also, consider the valuation from the Canada Revenue Agency’s perspective. The CRA could challenge your valuation, bringing unwanted tax trouble. Hence, getting your shares valued from a Chartered Business Valuator is recommended before freezing your assets. You can also add a price-adjustment clause, provided the transaction meets the criteria of a genuine business transfer at fair market value.

A knowledgeable wealth advisor could get you the correct value for your assets. 

Consider When and to Whom You Want To Transfer Your Estate To 

The whole concept of estate freeze springs up when you want to transfer the ownership of your estate to your family or employees without triggering an immediate tax liability. But what if you haven’t decided whom to transfer the estate to, or your children are too young to take ownership? In such a scenario, you can freeze your estate and postpone the transfer decision by 21 years through a family trust. 

You create a family trust to hold the new common shares of the operating company and make your family members the trust beneficiaries. The trustee has the right to give the shares and allocate rights that come with them to the beneficiaries. When your children are ready to take ownership, the trustee can provide them common shares. 

If you decide not to transfer ownership to anyone, you can make yourself the trust’s beneficiary and cancel the freeze. Cancelling a freeze is complicated and could have implications. Consult a professional wealth advisor to understand the 360-degree implication of your actions and take the route best for your situation. 

Consider How You Want To Freeze Assets

When you are sure an estate freeze is the right way forward, consider how you want to structure your estate freeze. This consideration depends on the type of estate, what you want to achieve from your estate and your tax implication. You can freeze your shares by transferring them to the company, a family trust, or a holding company. 

If you have a significant portfolio of investments, you can gradually transfer your assets to a holding company and get preference shares of the holding company. It is a complex business structure but has its benefits. For instance, assets transferred to the holding company are owned by the holding company and protected from individual and business credit liability. 

Plan to sell your business at a future date. You can keep transferring the operating company’s investments and cash reserves to the holding company on a tax-deferred basis. This way, you can qualify the operating company’s shares for long-term capital gain exemption ($971,190 for 2023). 

A qualifying company has,

  • 90% or more of assets in active business at the time of the sale of the business.
  • 50% assets in active business 24 months before the sale of the company. 

Moreover, the business owner must hold the shares for at least 24 months before the date of the sale. Even if you don’t sell the company, you can give your heir the option to sell the business and get an LCGE exemption. 

There is no one size fits all approach in estate planning. Each case is unique and has its complications and opportunities. A skilled wealth advisor has experience handling such complexities and could be your guide throughout this complex process. 

Contact Glenn Graydon Wright LLP in Oakville for Expert Estate Planning Advice

A skilled wealth advisor can help you plan your estate transfer tax-efficiently and in the best interest of your company. At Glenn Graydon Wright LLP, our wealth experts can provide services to support your tax and estate planning function, whether you need partial or complete support. In addition, we can provide you with recommendations on business structures best suited for your business. To learn more about how Glenn Graydon Wright LLP can provide you with estate planning expertise, contact us online or by telephone at 905-845-6633.