Estate Freeze in Canada: How Business Owners Lock In Value and Cut Tax on Death

An estate freeze locks the current value of your business into fixed-value preference shares in your name and redirects all future growth to the next generation, typically through new common shares held by a family trust. The result: the tax bill on your death is capped at today’s value rather than whatever the company is worth 10 or 20 years from now.

At Tohme Accounting, we structure estate freezes for business owners across Ottawa and Toronto. Most of these clients are in their late 50s or 60s, own a CCPC worth $1 million to $10 million, and want to transfer wealth to their children without triggering a seven-figure tax bill on death. The freeze is one of the most effective tools available, but it requires careful planning around share valuation, trust design, and the 21-year deemed disposition rule.

This post covers how an estate freeze works, the two main methods (Section 85 and Section 86), a worked dollar example, the family trust route, and the risks you need to manage.

What Is an Estate Freeze?

An estate freeze is a corporate reorganization that fixes (or “freezes”) the value of an owner’s interest in a company at its current fair market value. The owner exchanges their existing common shares for new preference shares with a fixed redemption value equal to the company’s current worth. New common shares, which start at nominal value, are issued to a family trust or directly to the next generation.

Under ITA subsection 70(5), when a taxpayer dies, they are deemed to have disposed of all their capital property at fair market value immediately before death. For a business owner holding common shares in a growing CCPC, this deemed disposition can produce a large capital gain. If the company is worth $500,000 today but $3,000,000 when the owner dies in 15 years, the capital gain on death is $2,500,000. At the current 66.67% inclusion rate for gains above $250,000, that puts $1,666,750 into income.

The estate freeze caps that exposure. After the freeze, the owner’s preference shares are worth $500,000 today and $500,000 on death, regardless of how much the company grows. The growth accrues to the new common shares held by the family trust or the children directly.

Section 85 vs Section 86: Two Ways to Freeze

There are two primary methods for executing an estate freeze in Canada. Both achieve the same outcome (exchanging common shares for fixed-value preference shares) but the mechanics differ, and the right choice depends on your situation.

Section 86 is the simpler path. You exchange your existing common shares for new preference shares in a share-for-share exchange. The cost basis of your old shares rolls over to the new preference shares automatically. No election is filed. The company issues new common shares to a family trust at nominal value (typically $1 per share). This works well when you do not want to trigger any capital gain and you do not need to crystallize your lifetime capital gains exemption.

Section 85 is more flexible. You transfer your common shares to the corporation and elect an “elected amount” on Form T2057. This amount can be set anywhere between the adjusted cost base and the fair market value of the shares. If you want to crystallize your LCGE (more on that below), you set the elected amount higher than cost, triggering a gain that the exemption shelters. You can also take back non-share consideration (cash or a promissory note) as part of the transaction.

Most freezes our firm handles use Section 86 when the goal is a clean, simple freeze with no immediate tax consequence. We use Section 85 when the owner wants to crystallize the lifetime capital gains exemption or take cash out of the company as part of the reorganization.

Freeze Shares: How Preference Shares Work

The preference shares issued in the freeze (often called “freeze shares”) have specific attributes designed to lock in the owner’s value while giving the next generation the growth.

Typical freeze share attributes:

• Fixed redemption value equal to the fair market value of the company at the date of the freeze. If the company is worth $2,000,000, each freeze share has a redemption value that totals $2,000,000.
• Non-participating. The freeze shares do not participate in any growth beyond their fixed value.
• Retractable. The owner can require the company to redeem (buy back) the shares at any time for their fixed value, giving the owner access to funds when needed.
• Voting. The owner retains voting control through the freeze shares, so they continue to run the business.
• Dividend entitlement at a fixed rate or at the board’s discretion. This allows the owner to draw income from the company post-freeze.

The share valuation at the time of the freeze is one of the most sensitive parts of the process. The CRA can challenge the valuation if it is too low (which understates the freeze share value and shifts too much value to the next generation, potentially triggering a benefit under ITA subsection 15(1)) or too high (which overstates the freeze and wastes the LCGE or creates unnecessary tax on death). At our firm, we work with qualified business valuators to establish a defensible FMV for the freeze date.

Worked Example: $2 Million CCPC, Owner Age 60

Consider an owner aged 60 with common shares in a CCPC currently worth $2,000,000 (adjusted cost base of $100). The company is growing at 8% annually.

Without an estate freeze:

If the owner dies at 80, the company would be worth roughly $9,320,000 (20 years at 8% growth). The capital gain on death would be approximately $9,319,900 ($9,320,000 minus $100 ACB). At the 66.67% inclusion rate for gains above $250,000, the taxable capital gain is approximately $6,213,200. At a combined federal and Ontario marginal rate of 53.53%, the tax bill on death would be roughly $3,325,000.

With an estate freeze at age 60:

The owner freezes at $2,000,000. On death, the deemed disposition is on the freeze shares worth $2,000,000. The capital gain is $1,999,900. After applying the $1,275,000 lifetime capital gains exemption (LCGE) for qualifying small business corporation shares, the taxable gain is reduced to $724,900. At 66.67% inclusion, the taxable amount is approximately $483,266. The tax on death is roughly $258,700.

The $7,320,000 in growth accrues to the common shares held by the family trust. That growth is in the next generation’s hands, subject to its own tax planning (trust distributions, income splitting among beneficiaries, and potential use of each beneficiary’s own LCGE on a future sale).

This is the kind of analysis we walk through with every business owner considering a freeze. The specific numbers change, but the structure is the same. Reach out to our team and we can run the comparison for your business.

The Family Trust Route

Most estate freezes involve a family trust (technically, an inter vivos discretionary trust) as the holder of the new common shares. The trust holds shares for the benefit of the owner’s children, grandchildren, or other family members.

The trust structure offers several advantages over issuing shares directly to the children:

The trustee retains control over distributions. If a child goes through a divorce, faces creditors, or is too young to handle the wealth, the trustee can withhold distributions. Shares held directly by a child have none of this protection.

Income splitting is possible. The trust can allocate dividends to beneficiaries in lower tax brackets, reducing the overall family tax bill. This is subject to the tax on split income (TOSI) rules under ITA section 120.4, which limit income splitting for minor children and adults who are not actively involved in the business. Adults over 24 who are actively engaged in the business are generally exempt from TOSI on dividends from that business.

Each beneficiary may be able to claim their own LCGE on a future sale. If the trust distributes shares to individual beneficiaries before a sale, each one can shelter up to $1,275,000 in capital gains. For a family with three adult children, that is $3,825,000 in exempt gains, plus the original owner’s exemption.

We have a detailed breakdown of trust income tax rates that covers how undistributed trust income is taxed at the top marginal rate (53.53% in Ontario), which is why most trusts distribute income annually rather than retaining it.

The 21-Year Deemed Disposition Rule

Every inter vivos trust in Canada faces a deemed disposition of its assets every 21 years under ITA subsection 104(4). On the 21st anniversary of the trust’s creation, the trust is deemed to have disposed of all its capital property at fair market value and reacquired it at the same value. This triggers a capital gain on any appreciation that has occurred inside the trust.

For a family trust holding common shares in a growing CCPC, this rule creates a hard deadline. If the freeze was done in 2026 and the trust was created at the same time, the 21-year deemed disposition falls in 2047. By that point, the common shares could be worth several million dollars, and the deemed disposition would trigger a significant tax bill inside the trust (taxed at the top marginal rate, since trusts do not benefit from graduated rates).

There are strategies to manage the 21-year rule:

• Distribute shares to beneficiaries before year 21. Transferring shares from the trust to individual beneficiaries on a tax-deferred basis (using the rollover provision in ITA subsection 107(2)) before the 21-year mark avoids the deemed disposition inside the trust. Each beneficiary then holds the shares personally.
• Wind up the trust before the deadline. If the beneficiaries are old enough and the circumstances are right, dissolving the trust and distributing all assets before year 21 eliminates the problem entirely.
• Plan a sale before year 21. If the business will be sold, timing the sale before the deemed disposition date lets you control the tax outcome. Each beneficiary can claim their own LCGE on their share of the gain.

In our practice, we build the 21-year date into every freeze plan from day one. It is a fixed deadline that does not move, and failing to plan for it can undo much of the tax benefit the freeze was designed to create.

LCGE Crystallization: Using Your Exemption at the Time of Freeze

The lifetime capital gains exemption for qualifying small business corporation (QSBC) shares is $1,275,000 in 2026, indexed to inflation. If you execute the freeze using a Section 85 rollover, you can deliberately trigger a capital gain by setting the elected amount above your adjusted cost base. The LCGE shelters the gain, and your new freeze shares take a higher cost base equal to the elected amount.

This is called “crystallization.” The benefit: when you die and the freeze shares are subject to the deemed disposition, the gain is smaller because the cost base of your shares is higher. You have already used the LCGE (which is only available on QSBC shares, not on preference shares that may not qualify at the time of death).

To qualify for the LCGE on QSBC shares, three conditions must be met at the time of the freeze:

1. The shares must be shares of a small business corporation (at least 90% of assets used in active business in Canada at the time of disposition).
2. Throughout the 24 months preceding the disposition, the shares must have been owned by the taxpayer or a related person.
3. Throughout that same 24-month period, more than 50% of the corporation’s assets must have been used in active business in Canada.

If the company holds significant passive investments (real estate, stock portfolios), the 90% asset test can be tricky. We often do a pre-freeze “purification” to remove passive assets from the company before the freeze, so the shares qualify for the exemption. This may involve paying out excess cash as dividends or transferring passive investments to a separate holding company.

This planning is specific to each business. If you want to know whether crystallization makes sense for your freeze, contact our team for a review.

Risks, Reversals, and When a Freeze Goes Wrong

An estate freeze is not permanent. It can be reversed (“melted”) if circumstances change, but unwinding one has tax consequences.

Valuation challenge by CRA. If the CRA determines that the FMV at the time of the freeze was different from the amount used, it can reassess. An undervalued freeze means the common shares received too much value (potential benefit to the trust beneficiaries under ITA subsection 15(1)). An overvalued freeze means the owner’s freeze shares are worth more than the company, which creates a different set of problems. A qualified independent valuation is the best protection.

Business declines after the freeze. If the company’s value drops below the freeze share redemption value, the freeze shares are “underwater.” The freeze locked in $2,000,000, but the company is now worth $1,200,000. The new common shares are worthless, and the preference shares cannot be redeemed at full value. In this case, a “refreeze” may make sense: reverse the original freeze and execute a new one at the lower current value.

Change in family circumstances. Divorce, estrangement, or a beneficiary’s death can change the trust dynamics. The trust deed should include provisions for these scenarios. A well-drafted trust agreement gives the trustee discretion to adjust distributions or add and remove beneficiaries.

TOSI restrictions. If a beneficiary is not actively engaged in the business, dividends paid to them from the trust may be subject to the tax on split income rules at the top marginal rate, neutralizing the income-splitting benefit.

Before proceeding with a freeze, we review each of these risks with clients and build the trust deed to handle as many scenarios as possible upfront.