Transferring estate freeze assets

Lots of business owners implemented estate freezes several years ago, when business values rose rapidly. If you opted for this tactic, you most likely exchanged your common shares for preferred shares (commonly called “freeze” or “frozen” shares) that had a fair market value equal to that of the exchanged common shares. New common shares, meanwhile, were issued either to family members or to a family trust.

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Simple enough, but it gets a bit more complicated.

If you’re in a situation where some, but not all, of your children are actively involved in the business, you might wonder what to do with the freeze shares for estate planning purposes. Canadian tax authorities require freeze shares to remain redeemable at the shareholder’s option for an amount equal to the fair market value of the exchanged common shares. And, if freeze shares are transferred to any children not actively involved in the business, the owner can’t preclude the children from requiring the corporation to redeem those shares immediately.

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So, to whom should you transfer the freeze shares? It depends on your intended outcome, but you have to weigh your wishes against some potential negatives. Here’s an outline of the pros and cons, broken down by potential recipient of the freeze shares.

	Pros	Cons
Spouse	No immediate tax payable upon your death If life insurance is available, shares can often be redeemed tax-free (a shareholders’ agreement is strongly recommended)	A spouse can require the corporation to redeem his or her shares, and may do so even if not in the corporation’s best interests The spouse owns the shares, and so can leave them to a new spouse or children from a first marriage No asset protection, because the shares are owned directly by the spouse (by contrast if a trust owned the shares, there is no particular beneficiary, so a creditor could seize interest in the trust but not the shares)
Testamentary Spousal Trust	No immediate tax payable upon your death Strategy creates income-splitting opportunities If life insurance is available, shares can often be redeemed tax-free A testator can name the beneficiaries who will receive the freeze shares upon death of the surviving spouse in his or her will Provides asset protection (having a trust own the shares means there’s no particular beneficiary; so a creditor could seize interest in the trust but not the shares)	Trust may require the corporation to redeem all its shares, even if it’s not in the corporation’s best interests
Children not actively involved in the business	Can help equalize the estate, if the testator does not have other assets	Any transfer will most likely trigger a capital gain on the part of the business owner transferring the shares at death Strategy may put pressure on the corporation to redeem the shares No asset protection Child may leave shares to beneficiaries of his or her choice when he or she dies
Children involved in the business	Will not put pressure on the corporation to redeem the shares	Child may leave shares to beneficiaries of his or her choice No asset protection
Discretionary Testamentary Family Trust	All the children can be beneficiaries (in most cases, trustees will choose which of the beneficiaries will receive assets, income or capital from the trust. It’s also possible to have a non-discretionary trust and provide in advance how much will be paid to whom) Trustees can pay dividends or capital to any beneficiary Creates income-splitting opportunities Asset protection (having a trust own the shares means there is no particular beneficiary; so a creditor could seize interest in the trust but not the shares) If one beneficiary dies, there’s no impact on the ownership of the shares	Trustees must be chosen carefully (they should have some finance expertise to understand the impacts of leaving shares to one beneficiary as opposed to another, and understand income-splitting opportunities. Trustees should have a good understanding of what the business owner wanted to achieve when the time comes to transfer the shares to specific beneficiaries. If one child is chosen as trustee, and not the others, it may cause conflicts)

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Caroline Rheaume

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