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The business of succession planning

April 20, 2023

As a small business owner, succession planning could be a major risk to your business. Ensuring a smooth, tax-efficient transition from one generation to the next is the ideal outcome, and in some situations, an estate freeze can be a helpful tool.

Who might consider an estate freeze?

Before we dig into the details of an estate freeze, it is important to understand who might want to consider one. Typically, an estate freeze would be undertaken by an incorporated family business owner with an eye on retirement who wishes to pass the business ownership on their death to someone else, usually one or more family members. The business will have gained value over time and be expected to continue to grow.

Further, the business owner would be confident they do not require the business' future growth to fund any lifestyle or legacy needs, such as retirement provisions.

In addition to passing on eventual ownership, the prospective owner will also be taking on the tax liabilities resulting from any gain in the business' value, starting from the date of the estate freeze. In turn, this will reduce the current business owner's tax bill on the eventual business transfer.

What is an estate freeze?

An estate freeze is a tool that can help a family business owner minimize a significant tax bill when they transfer ownership of their business to someone else, often a child or another family member, or in some cases, a family trust.

It accomplishes this by 'freezing' the business's current value in a set of newly issued fixed-value preferred shares held by the current business owner in exchange for their existing common shares. This move effectively zeros the company's value at that point in time, allowing new common shares to be issued at a nominal value to the new shareholder.

The new common shares track the growth of the company, such that any future appreciation of the business' value and its associated tax liability is assumed by the new shareholder.

For the current business owner, tax liabilities on the preferred shares are deferred until redemption, death, or the sale of the business.

What are the benefits of an estate freeze?

There can be tax benefits to the current and future business owners in an estate freeze. When estate planning, the current owner will know their tax liability on death relating to their business interests since their ownership value is fixed via their preferred shareholding. Their tax bill will not increase if the value of the business grows—such liabilities will be passed to the future owner.

For a new shareholder, they are only liable to pay capital gains tax on the value of the company from the date of the estate freeze. Without a freeze, they would have to pay tax on gains accrued from the incorporation date. Also, if they are in a lower tax bracket than the current owner and decide to sell, they will face a smaller tax bill.

Business owners can also use an estate freeze to ensure certainty about future ownership while retaining business control. The fixed-value preference shares can have special voting rights attached, or the newly issued common shares can have limited voting. Another option is to hold the common shares in a family trust.

Estate freeze planning

Planning an estate freeze is a significant step. It should be undertaken only with advice from trusted experts, including your financial advisor, accountant, lawyer and an experienced business valuator.

Our wealth advisors across the country are always ready to answer your questions. Whether you are a valued client or interested in discovering more about how CC&L Private Capital can steward your wealth with confidence, please feel free to call or email us anytime.


This post is for information only and not intended as investment advice. The views expressed are subject to change at any time.

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Catherine Dorazio
Managing Director
Business Development

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