An estate freeze is a tax planning tool used by owners of Canadian privately held corporations to limit capital gains tax on the future growth of a company by “freezing” the value of the owner’s shares at a fixed value as of a certain date and passing on any future growth in value to other family members.
This is usually done by the owner exchanging his common shares in the company for “preferred” shares that have a fixed value. At the same time, the corporation will issue common shares to new shareholders -usually children, other family members, or a family trust. Any growth in the value of the corporation is attributed to the common shareholders.
Bu using an estate freeze, a business owner can avoid a large capital gain due to the deemed disposition of all capital assets set out in the Income Tax Act.