Techniques for Estate Freeze Planning

Mar 19, 2025

Estate Freeze Techniques

In this lecture, we explore the different techniques used to perform an estate freeze. These techniques are broadly categorized into two types: internal and external techniques. Understanding these methods is crucial for estate planning and tax optimization.

Internal Techniques

Internal techniques do not require the creation of separate entities for the estate freeze. The main methods include:

Donation

  • Process: The author donates shares to successors.
  • Tax Implications:
    • Deemed disposal at fair market value (FMV) results in immediate taxable capital gains.
    • Mitigation possible through the capital gains deduction if shares are qualified small business corporation shares.
    • No capital gains reserves can be claimed since the donor receives FMV.
  • Considerations: Loss of control over shares and potentially the company.

Direct Sale of Shares

  • Process: Selling shares to successors in a bona fide transaction.
  • Tax Implications:
    • Immediate taxable capital gains.
    • Mitigation possible through capital gains deduction for qualified shares.
  • Considerations: Requires legal documentation and financing for successors, possibly through personal loans or a holding company.
    • Use of a holding company may trigger section 84.1 deemed dividend rules.

Exchange of Shares

  • Process: Exchanging common shares for preferred shares within the same corporation.
  • Methods:
    • Section 85(1) Rollover: Involves rolling over shares in exchange for preferred shares with potential tax-free implications if elected amount equals ACB.
    • Section 86 Reorganization: Disposal of common shares for preferred shares without capital gains if disposition amount equals ACB.
    • Section 51 Convertible Property: Exchange of convertible property for preferred shares without non-share consideration.
  • Considerations:
    • Section 85(1) allows crystallization for capital gains deduction.
    • Sections 86 and 51 are automatic and do not require forms.

External Techniques

External techniques involve the creation of a separate entity, such as a holding company, to facilitate the estate freeze.

Sale to a Holding Company

  • Process: Selling operating company shares to a family holding company owned by beneficiaries.
  • Tax Implications:
    • Section 85(1) rollover can be used for a tax-free exchange if elected amount equals ACB but may trigger section 84.1 deemed dividend rules if among related persons.
  • Considerations: Adds complexity due to the involvement of another corporation and potential conversion of capital gains to dividend income.

Key Considerations

  • Priority of Sections: Section 85(1) takes precedence over section 86, and section 86 over section 51.
  • Crystallization: Only possible with section 85(1) as it allows choice of disposition amount.
  • Asset Exchange: Section 51 cannot be used if non-share assets are involved.

These techniques are vital tools for managing estate transitions and ensuring tax efficiency. Understanding the nuances of each approach helps in selecting the most suitable method based on individual circumstances.