What is an estate freeze and why do small business owners in Ontario use it?

An estate freeze is a tax and succession planning strategy that "freezes" the current value of your business shares in your hands and shifts future growth to the next generation or a family trust. It is particularly relevant for profitable corporations whose value is expected to grow significantly.

The most common structure involves exchanging your common shares (which hold all the current and future value) for fixed-value preference shares (preferred shares with a redemption value equal to today's fair market value) and issuing new common shares — at a low value — to children, a family trust, or a holding company for the next generation.

From that point, the preferred shares you hold are frozen at today's value, and all future appreciation accrues to the new common shares held by the next generation. When you eventually redeem your preferred shares or they are redeemed on death, the gain is locked in at the value on the freeze date. The next generation's shares can benefit from their own capital gains exemptions on eventual sale.

An estate freeze is not a simple transaction — it involves share structure changes, valuation, tax elections, and careful drafting of terms. It is closely connected to succession planning. A lawyer working alongside an accountant is essential.