estate freezes what are they & how do they work?

2004

Estate FreezesEstate FreezesWhat are they & how do they work?What are they & how do they work?

2004

What is an Estate Freeze?

• It is a transaction that allows you to exchange shares that are increasing in value for shares and other assets that are fixed in value

2004

Benefits of an Estate Freeze

• Control assets during life• Transfer assets without immediate tax liability• Shift increase in asset value and associated tax

liability to next generation• Create an income stream• Creditor protection

2004

Without an Estate Freeze

Example: Father (45) has company with a FMV of $5,000,000 ACB is $0 Eligible for $500,000 capital gains exemption Father marginal tax rate is 50%

His tax liability at death : $1,125,000$1,125,000

2004

Additional assumptions: Father continues for 15 years, without an

estate freeze Father now aged 60 Business has doubled, FMV $10,000,000 Father dies age 60:

• Capital gains tax liability, business asset, has increased from $1,125,000$1,125,000 to $2,375,000$2,375,000


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• With estate freeze at 45, tax liability at 60 would have remained at $1,125,000$1,125,000.

• Excess $1,250,000$1,250,000 ($2,375,000 – $1,125,000($2,375,000 – $1,125,000) would pass to the next generation (children and grandchildren)


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Missed opportunities : Income split (eg. dividends) with wife and

children/grandchildren Provide inheritance to family Create a future income stream Multiply capital gains exemption Creditor proof corporation Create a legacy that would remain in family


2004

OpcoOpcoOpcoOpco

YOUYOUYOUYOU

FamilyFamily

TrustTrust

FamilyFamily

TrustTrust

BeneficiariesBeneficiaries

children grandchildrenchildren grandchildren



HoldcoHoldcoHoldcoHoldco

Step 3, You transfer 100% preferred shares with FMV equal to value of common shares to newly incorporated holding company

Step 1: Your exchange common shares of Opco for fixed value preferred shares of same value

Step 2: New non-voting common shares would be issued to family trust

Accomplishing an Estate Freeze Section 85

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22

33

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Advantages Can combine more than one asset/company in the

transaction Assists in creditor protecting

creates vehicle to receive tax-free intercorporate dividends

Provides flexibility if partial freeze intended

Disadvantages Somewhat complex May complicate future share sale transactions

Estate Freeze – Section 85

2004

Step 1: You exchange Opco shares for preferred shares

Step 2: New non-voting common shares would be issued to family trust

Accomplishing an Estate Freeze Section 86

OpcoOpcoOpcoOpco

YOUYOUYOUYOU

FamilyFamily

TrustTrust

FamilyFamily

TrustTrust





22

Co

mm

on

s

Pre

ferre

ds

2004

Advantages Simple No additional corporate entity Maintains existing structure

Disadvantages No creditor protection

Estate Freeze – Section 86

2004

Estate Freeze – Summary

Seriously consider when : Limit/reduce/fix tax liability Income splitting Creditor protection Purification of corporate assets Multiply Capital Gains exemption Keep maximum business value in family

• Failure to consider may cause problems if business owner dies or becomes disabled

estate freezes what are they & how do they work?

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