Unlocking Wealth Preservation: How Estate Freezes Cut Taxes and Secure Succession
For high-net-worth business owners in Canada, wealth preservation and succession planning are key priorities—especially when considering the eventual transfer of assets to the next generation. Under Canadian income tax law, individuals are deemed to have disposed of all their assets at fair market value immediately before death. This can trigger a significant tax liability in the year of death. If the estate includes shares of a privately held business, there may be insufficient liquid assets to cover the tax, potentially jeopardizing the continuity of the business and its transfer within the family. While this tax can be deferred when assets are left to a spouse or a spousal trust, that deferral is only temporary and does not apply when the shares are ultimately passed to the next generation. One advanced tax and estate planning strategy that can be highly effective in this context is the Estate Freeze. When executed correctly, it can dramatically reduce taxes payable on death, facilitate intergenerational wealth transfer, and provide long-term financial security for the family.
In this blog, we’ll break down what an Estate Freeze is, when it makes sense to use it, the tax benefits, and how it works in a Canadian context.
What Is an Estate Freeze?
An Estate Freeze is a tax planning strategy that allows a business owner (or other asset holder) to "freeze" the current value of their interest in a business or other appreciating asset. Future growth of the business or asset is then passed on to the next generation or to a family trust, deferring tax on that growth and limiting the owner’s future tax liability upon death.
In a typical Estate Freeze, the current owner exchanges their common shares of the company (which typically grow in value) for fixed-value preferred shares, locking in the current value. New common shares (with future growth potential) are then issued to a family trust or directly to children or successors.
When Is an Estate Freeze Most Effective?
Estate Freezes are most effective for:
High-net-worth business owners whose business is expected to continue growing substantially.
Owners nearing retirement or thinking about succession planning.
Families looking to minimize estate taxes and pass on wealth to the next generation efficiently.
Entrepreneurs who want to introduce family members to business ownership gradually, without losing control.
Owners who want to crystalize their capital gains at today’s tax rates, anticipating potential tax increases in the future.
Key Tax Benefits of an Estate Freeze
1. Capital Gains Tax Planning
By freezing the value of your interest at today’s fair market value, you limit your future exposure to capital gains tax. On death, only the frozen value is subject to deemed disposition rules, not future appreciation.
2. Income Splitting Potential
When new common shares are issued to a family trust, income splitting opportunities open up, especially if trust beneficiaries are low-income family members (subject to attribution rules and the Tax on Split Income (TOSI) rules).
3. Utilization of Lifetime Capital Gains Exemption (LCGE)
Each Canadian resident individual is eligible for a Lifetime Capital Gains Exemption (LCGE) on the disposition of Qualified Small Business Corporation (QSBC) shares—over $1 million as of 2025. Structuring the Estate Freeze properly can allow multiple family members (via a family trust) to each access their LCGE, multiplying the exemption and potentially shielding millions in gains.
4. Estate Tax Deferral
By transferring future growth to the next generation now, the estate can defer the taxes related to that appreciation until a later disposition, avoiding a large tax bill at death.
How an Estate Freeze Works – Step by Step
Valuation: Obtain a fair market valuation of the business or asset.
Share Reorganization: The owner exchanges their common shares for fixed-value preferred shares equal to the current value.
Issuing Growth Shares: The corporation issues new common shares (with nominal value) to a family trust or directly to heirs.
Control Retention (Optional): The preferred shares can carry voting rights, allowing the original owner to retain control of the business during the transition period, if they so choose.
Ongoing Growth: Future increases in value accrue to the new common shareholders, i.e., the next generation.
Estate Planning Integration: The strategy is integrated into the owner’s broader estate and tax plan, often including a will, trust documents, and shareholder agreements.
Key Considerations Before Implementing an Estate Freeze
TOSI Rules: The Tax on Split Income rules can limit the benefits of income splitting with family members under certain circumstances.
QSBC Eligibility: For the LCGE to apply, the shares must meet specific conditions under the Income Tax Act—proper planning is critical.
Professional Valuation: CRA may challenge valuations. An independent, documented valuation can help defend the freeze structure.
Loss of Flexibility: Once implemented, undoing a freeze can be complex and expensive. Plan carefully with professional advisors.
Trust Planning and 21-Year Rule: Trusts are deemed to dispose of assets every 21 years. Planning must address how and when assets will be distributed or rolled out of the trust.
Final Thoughts
An Estate Freeze is a powerful tool in the toolkit of Canadian business owners and wealthy families. It enables efficient wealth transfer, minimizes tax exposure, and supports orderly succession—all while keeping control in the hands of the founder, if desired.
However, the strategy must be implemented with careful legal, tax, and financial advice. Every family’s situation is different, and there are many nuances in the tax rules that need to be considered.
If you're a business owner contemplating retirement or succession, or simply want to future-proof your estate, now is the time to contemplate about whether an Estate Freeze is right for you. Get in touch with us to see if this is the right strategy for you and your future!
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Please consult with a qualified professional to assess your specific situation.