What scenarios can take advantage of an Estate Freeze?

Neufeld Legal PC: Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

Serious analysis and investigation should be undertaken, and critical consideration to the implementation of the appropriate estate freeze, where you have significant appreciating assets, like businesses and/or real estate, that you are seeking to manage and minimize the tax burden on these assets, so as to ensure a more efficient transfer of wealth to future generations, in particular in the following scenarios:

A. Business Owners with Growing Businesses:

  • Succession Planning: This is perhaps the most common and ideal scenario. A business owner who intends to pass their business on to the next generation (children, key employees, etc.) can freeze the current value of their shares. This ensures that any future growth in the business's value accrues to the new shareholders, minimizing the capital gains tax liability for the original owner upon their death or when they eventually dispose of their frozen shares.

  • Retaining Control: The original owner can often retain control of the business through their preferred shares (which may carry voting rights) while the growth shares (common shares) are held by the next generation or a family trust. This allows for a smooth transition of ownership without the freezor immediately relinquishing control.

  • Preparing for a Future Sale: If a business is expected to be sold in the future, an estate freeze can be implemented beforehand to cap the owner's capital gains exposure, ensuring that the substantial future sale price benefits the next generation in a tax-efficient manner.

B. Owners of Appreciating Assets (Real Estate, Investments):

  • Significant Future Growth Expected: If you own assets (e.g., real estate, a private investment portfolio) that are expected to grow substantially in value, an estate freeze can cap your capital gains tax liability on that asset at its current value. Future appreciation then accrues to your beneficiaries, reducing your estate's eventual tax burden.

C. High Net Worth Individuals:

  • Minimizing Capital Gains Tax on Death: Canadian tax law has a "deemed disposition" rule on death, meaning all capital assets are considered sold at fair market value, triggering capital gains. For high-net-worth individuals with substantial appreciating assets, this can lead to a significant tax bill. An estate freeze mitigates this by fixing the taxable value of assets at the freeze date.

  • Wealth Preservation: It allows for the efficient transfer of significant wealth to future generations, preserving more of it from taxation.

D. Income Splitting Opportunities:

  • Distributing Income to Lower Tax Brackets: By issuing growth shares to family members (often via a family trust) who are in lower tax brackets, income (e.g., dividends from the frozen company) can be distributed more tax-efficiently within the family. This can reduce the overall family tax burden, although strict "Tax on Split Income" (TOSI) rules must be carefully navigated.

E. Utilizing Lifetime Capital Gains Exemption (LCGE):

  • Multiplying LCGEs: For qualifying small business corporation (QSBC) shares, each Canadian resident individual has a lifetime capital gains exemption (currently over $1 million). By including multiple family members (or beneficiaries of a family trust) as owners of growth shares, an estate freeze can allow for the multiplication of this exemption, significantly reducing capital gains tax on the eventual sale of the shares.

F. Long-Term Estate Planning:

  • Providing Certainty for Future Tax Liabilities: By freezing the value of assets, the owner gains a clearer picture of their potential future tax liability related to those assets. This certainty allows for better planning, such as purchasing life insurance to cover the tax bill.

  • Asset Protection: In some cases, a properly structured estate freeze can offer a degree of asset protection by transferring future growth out of the original owner's direct ownership.

  • Planning for the "21-Year Rule" (with Family Trusts): While a risk, the 21-year deemed disposition rule for trusts also creates an opportunity to strategically plan the distribution of assets from the trust to beneficiaries before that milestone, taking advantage of individual tax attributes.

G. "Refreeze" Scenarios (Market Downturns):

  • Depressed Asset Values: In periods of economic downturn where asset values are temporarily depressed, it can be an opportune time to implement a new estate freeze or a "refreeze." This locks in a lower value, maximizing the potential for future tax-free growth to accrue to the next generation when the market recovers.

Significance of Professional Advice: As with most tax planning strategies, an estate freeze is a complex technical process, which requires the application of strict rules to the particular facts and circumstances. It is highly recommended to seek advice from an accountant and a tax lawyer to ensure legal compliance and to properly structure the transaction for your specific circumstances and objective outcomes.

For knowledgeable and experienced tax law representation for estate freezes and other tax planning strategies, contact tax lawyer Christopher R. Neufeld at Chris@NeufeldLegal.com or call 403-400-4092 (Calgary, Alberta) / 905-616-8864 (Toronto, Ontario).

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