Your Finances with Stephen Maltby
An estate freeze is a recognized tax-planning technique used by owner-managers to achieve a wide range of objectives for their businesses. These can include:
- passing the business and its future growth to the next generation
- maximizing use of small business and capital gains exemptions for farms and qualifying small business shares
- maintaining future cash flow sufficient to meet the needs of the owner
- minimizing capital gains tax payable upon the death of the owner
- taking advantage of income-splitting
- maintaining flexibility in retaining or transferring control to the next generation
- preserving the value and continuity of the business for inter-generational transfers
An estate freeze allows a business owner to pass their companies' future growth to one or more children or other family members while maintaining a degree of control over the company. Future growth of the company passes directly to the children or other family members who hold common shares of the company, or indirectly to the children or other family members through the use of an intervivos family trust, which holds the common shares of the company. (Note that an estate freeze is possible between arms’ length parties; however, as they occur most often between parents and their children, this article assumes a parent is undertaking the estate freeze and is passing assets to a child or children.
Several techniques for implementing an estate freeze are available to small business owners are listed below :
There are several techniques for implementing an estate freeze. The basic ones in use today include:
1. reorganization of share capital, in which common shares of an operating company are converted or exchanged into preferred shares
2. use of a holding company, in which common shares of an operating company are transferred to a holding company in exchange for preferred shares
3. an asset transfer, in which assets of an operating company are transferred to a new operating company or partnership in exchange for preferred shares
4. gift of assets or shares by a parent
5. sale of assets or shares by a parent
Business owners should consult their trusted advisors to get professional advise on these matters.
Stephen Maltby is an Investment Adviser and Chartered Accountant with CIBC Wood Gundy. He has been in the financial services industry for more then 30 years and has held various accounting, investment and management positions with several accounting and investment firms over the years.He is in addition to his Advisor role a First Vice-President and Executive Director Atlantic Canada, CIBC Wood Gundy.