What is an estate freeze and how is it used in Ontario?

An estate freeze is a strategy used in Ontario estate and tax planning, typically for business owners or people with significant appreciated assets, to "freeze" the current value of those assets in the hands of the owner and shift future growth to the next generation or a family trust.

The mechanics often involve exchanging common shares in a private corporation for fixed-value preferred shares. The preferred shares lock in today's value; new common shares are issued to children or a family trust that will capture all future growth. This means the capital gain that will be triggered at the owner's death is capped at today's value, while the estate pays tax only on that frozen amount rather than on whatever the business might be worth decades later.

Estate freezes also allow income splitting in some circumstances — income earned by a family trust can be distributed to beneficiaries in lower tax brackets, subject to the kiddie tax rules under the federal Income Tax Act that restrict income splitting with minors and certain related adults.

An estate freeze is complex and requires coordinated legal and tax advice. It must be set up properly to avoid unintended tax consequences, and it should be reviewed periodically as values and family circumstances change. It is not a strategy for most people — it makes sense primarily for those with growing businesses or investment portfolios and a plan for succession.