An estate freeze is one of the most powerful tax planning strategies available to Canadian business owners. It allows you to fix (freeze) the value of your estate at today's level for tax purposes, transferring all future growth in a business or investment portfolio to the next generation — effectively capping your capital gains tax liability while shifting future appreciation to your heirs or a family trust.
This guide explains how an estate freeze works in Canada, the mechanics of the transaction, how it interacts with the Lifetime Capital Gains Exemption, and when it makes sense to implement one.
An estate freeze is a restructuring of share ownership designed to achieve two objectives:
After a freeze, the business founder holds fixed-value preferred shares equal to the current value of the business. New common shares (typically with a nominal value) are issued to a family trust or directly to the next generation. As the business grows, all that additional value accrues in the new common shares — outside the founder's estate.
The most common estate freeze mechanism uses Section 86 of the Income Tax Act. The existing shareholder exchanges their common shares (which carry all the value and future growth) for newly issued preferred shares with a fixed redemption value equal to the current fair market value of the business. Simultaneously, new common shares are issued to beneficiaries or a family trust at a nominal value (often $1).
The Section 86 exchange is done on a tax-deferred basis — no immediate capital gain is triggered on the exchange (assuming the shares are exchanged at fair market value and technical requirements are met).
An alternative approach uses Section 85 to roll assets into a new holding company on a tax-deferred basis. The individual transfers their common shares of an operating company to a new holding company in exchange for fixed-value preferred shares of the holdco. The holdco then issues common shares to a family trust or the next generation.
An estate freeze is often combined with a family trust holding the new common shares. This allows the family to multiply the LCGE on a future sale of the business. In 2025, each eligible individual can claim $1,250,000 in the LCGE on qualifying small business corporation (QSBC) shares.
If a family trust holds the common shares with five beneficiaries (two parents, two adult children, a grandparent), potentially five LCGEs could be claimed on a sale — sheltering up to $6,250,000 in capital gains from tax. The tax savings at Ontario's combined capital gains rate can exceed $1.5 million on a sale.
Careful planning is required to ensure that at the time of sale, the shares held by the trust meet the QSBC definition, and that each beneficiary to whom gains are allocated meets the applicable conditions.
The preferred shares received by the freezor in an estate freeze typically have:
At death, the founder is deemed to have disposed of their preferred shares at fair market value. The capital gain on those shares equals the difference between the redemption value and the adjusted cost base. If the freeze was done cleanly, the ACB equals the redemption value, resulting in no capital gain — all the tax was deferred and will be paid by the next generation when they eventually realize their gains on the common shares.
Life insurance is often used in estate freeze planning to fund any residual tax liability and provide liquidity for the estate.
An estate freeze is most valuable when:
An estate freeze done too early (when the business has minimal value) captures little benefit. Done too late (when the business is worth far more than the LCGE threshold), it still freezes further growth but the founder retains a large tax exposure on the preferred shares.
A partial freeze allows the founder to retain some common shares (and therefore some future growth) while transferring the balance to the trust. This is useful when the founder wants to maintain a stake in the upside rather than freezing 100%.
If business value has grown significantly since the original freeze, a re-freeze (second freeze) can be executed to freeze the new higher value and reset the growth share going forward. Multiple freezes are possible, though each adds complexity and professional fees.
An estate freeze requires the coordinated work of:
Total professional costs for an estate freeze typically range from $100 to $30,000 or more depending on complexity. For a business worth millions with significant future growth, this is a very cost-effective investment.
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