Estate freeze for business owners: complete guide 2026

How does an estate freeze work?

The owner exchanges common shares (which have appreciated over the years) for preferred shares with a redemption value equal to the current fair market value (FMV) of the company. This exchange is done on a tax-deferred basis under sections 51, 85, or 86 of the Income Tax Act (ITA).

Simultaneously, new common shares with a nominal value (typically $1 total) are issued to children, grandchildren, or a family trust. All future growth of the company accrues to the holders of these new common shares.

Legal mechanisms: sections 51, 85, and 86 ITA

Section 51 ITA: share exchange within the same corporation. The owner exchanges common shares for preferred shares of the same corporation. This is the simplest and most common mechanism for an estate freeze.

Section 85 ITA: rollover of assets to a corporation. Allows the transfer of assets (including shares) to a corporation in exchange for shares and non-share consideration, with an elected amount between cost and FMV.

Section 86 ITA: reorganization of share capital. When reorganizing, old shares are exchanged for new shares. The cost base of old shares transfers to the new shares.

Lifetime capital gains exemption (LCGE)

In 2026, the lifetime capital gains exemption for qualifying small business corporation (QSBC) shares is $1,250,000. This exemption allows each individual shareholder to realize up to $1,250,000 in capital gains tax-free when selling qualifying shares.

An estate freeze allows multiplying the use of this exemption: if the new common shares are held by multiple children (directly or through a trust), each can claim their own exemption on a future sale, multiplying the tax benefit.

Family trust

A family trust is often used to hold the new common shares issued during the freeze. It provides flexibility in timing and amount of distributions to beneficiaries, asset protection (shares are not directly held by minors or vulnerable beneficiaries), and tax optimization through income splitting.

Important: TOSI (Tax on Split Income) rules limit income splitting with minors and certain non-active adult family members. It is essential to consult a tax specialist to structure the trust correctly.

The 21-year rule applies to trusts: a deemed disposition of assets at FMV occurs every 21 years. Planning must account for this (distribution before the anniversary, rollover, or tax payment).

Life insurance to fund tax at death

At the owner's death, the preferred shares are subject to a deemed disposition at their redemption value. The resulting tax can be substantial. Corporate-owned permanent life insurance provides the liquidity needed to pay this tax without forcing a sale of the business.

The death benefit (less the ACB) is credited to the corporation's CDA. This amount can then be paid as a tax-free capital dividend to the estate to cover the tax obligation.

Who should consider an estate freeze?

An estate freeze is suited for business owners whose company has significant and growing value, who wish to transfer future growth to the next generation, who want to limit tax at death on the current value of the business, and who have children or grandchildren likely to take over or benefit from the growth.

Frequently asked questions