Looking to found a family business dynasty? Here's a
sobering statistic: Only about 10% of family-owned businesses make
it past the third generation. This has a lot to do with the lack of
proper planning while the founding parents are still alive. One way
to give your business at least a fighting chance to go beyond the
third generation is to implement something that estate lawyers call
an "estate freeze."
If you carry on a family business and are considering bringing
the next generation into the business as owners, then it may be
time to think about how to best accomplish this in the most
tax-efficient way possible. If you are not sure your kids want to
carry on the family business, a succession plan can also be an
important tool in minimizing taxes on an eventual sale.
So regardless of your goals as a family business owner, consider
alternative structuring for your business by implementing an estate
freeze of your operating business (which we'll call
What is an estate freeze?
An estate freeze refers to the transferral of future growth in
the value of a business, investments, or other assets into the
hands of your kids. An estate freeze typically limits the value of
your estate in relation to your corporation holdings to the value
of Opco at the date the freeze is implemented (don't worry, you
still retain the current value of Opco, although often in a
different form). Accordingly, capital gains and other tax exposure
to the future growth that would arise when the assets pass from you
to your kids are avoided.
In order to get the full benefit of an Estate Freeze, your
shares in Opco will be reorganized into a class of "freeze
shares" that will not be entitled to any future growth (but
will still get the benefit of dividends based on a pre-determined
date). New growth shares can then be issued to your kids (or a
discretionary family trust for the benefit of your kids) without
triggering any tax hits. Any future growth in the value of the
assets held by Opco will then accrue to these growth shares (and
not to you).
Why do an estate freeze?
We implement most tax-related strategies to cut our tax bill.
But why you would give up future growth to save on tax? Well,
chances are that you may have acquired enough value in your current
assets to keep you happy for the rest of your life. By putting in
place an estate freeze, you will maximize the value of your estate
that will ultimately pass to your beneficiaries.
Upon your death, you are deemed to have disposed of all of your
assets at their fair market value, and your estate is required to
pay the capital gains tax on this "deemed disposition ".
The implementation of an Estate Freeze will effectively
"freeze" the value of your interest in Opco to
present-day value, with any future growth in Opco flowing in favour
of your kids or a family trust (assuming you give them the growth
This means that your interest in Opco will no longer grow in
value. The upside, however, is that the capital gains and other tax
that would otherwise be triggered on your death will be limited to
the frozen value of Opco. Future growth in Opco from the date of
the estate freeze to your death will be taxable only if your
children sell the shares or when they pass away. Less tax to the
CRA means more for your beneficiaries.
In order to maximize the benefit of the Estate Freeze, this
strategy is usually implemented when Opco (or the assets in Opco)
are expected to appreciate in the future. If the assets are
expected to depreciate, it would usually be preferable to hold off
freezing. Also, if you feel that the current value of the assets is
not high enough for you to live on for the rest of your life, you
may want to think twice about freezing.
In early February 2015, the Washington based International Consortium of Investigative Journalists released its latest report on the depths of HSBC’s involvement with clients in a wide array of illegal activities
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