An Estate Freeze That Uncovered a Decade of Loose Records

The situation

Amalia is a specialist physician in Toronto, but medicine was never her only business. Twenty-two years ago she and a colleague, Darius, put up savings to start a company supplying specialty medical equipment to clinics and hospitals across Ontario. Darius ran operations day to day; Amalia kept her medical practice and sat as a director and roughly half owner. The company grew steadily, and by this year it was billing about $38 million a year, with two smaller shareholders holding minority stakes brought in over the years to fund expansion.

Amalia was now in her early sixties and wanted to start handing the company's future to the next generation without handing over control today. Her daughter Niloufar, a technology executive with no background in medical supply but sharp instincts for operations, had spent two years learning the business on evenings and weekends and was ready to take on real ownership. Amalia came to Treadstone Law wanting what is commonly called an estate freeze: a restructuring where a shareholder exchanges their common shares — the class that carries unlimited upside as a company grows — for a fixed-value class of preferred shares, while new common shares are issued to the next generation at a low starting value. Done properly, all future growth in the company accrues to the new shareholder, and the amount of tax eventually owing on the founder's shares is locked in at today's value instead of ballooning with decades of future growth.

What the review found

Before any freeze, the standard first step is a review of the company's minute book — the company's internal record of who owns what, when shares were issued, and what the directors and shareholders have formally approved over the years. A clean minute book is what lets a lawyer say with confidence exactly what shares exist, who holds them, and what they're worth for the freeze paperwork.

Amalia's minute book had not been meaningfully updated since the company's early years. The accountant who prepared the annual financial statements had been recording dividends paid to shareholders each year in the books, but no one had been preparing the director resolutions that are supposed to authorize those dividends before they go out. A dividend is a payment from a company to its shareholders out of profit, and under the Ontario Business Corporations Act it has to be formally declared by the directors and has to pass a solvency test confirming the company can still cover its debts and has assets left over after the payment. Skipping the resolution doesn't just leave a paperwork gap — it means there's no clean evidence the legally required test was ever considered at the time.

Most of the missed resolutions were fixable after the fact through corrective paperwork. One year stood out. Six years earlier, in a year the company had taken on a large loan to buy new warehouse space, a dividend of roughly $180,000 had gone out to the four shareholders. The company's own financial statements from that year showed thin margins and heavy debt service. There was a real possibility that, tested honestly against the solvency requirement at the time, that dividend should not have been paid at all.

What we did

1. Paused the freeze until the records were sound. An estate freeze depends on an accurate picture of who holds what shares and what the company was worth at each stage of its history. Building that structure on top of undocumented dividends risked baking the same defect into the new paperwork.
2. Reconstructed six years of missing resolutions. For the dividends that the company's financial position could reasonably support at the time they were paid, we prepared ratifying resolutions — director and shareholder documents confirming, after the fact, that the payments were properly authorized and that the company met the required solvency test when each was made.
3. Flagged the one dividend that could not be safely ratified. For the roughly $180,000 payment made during the heavily leveraged year, the financial statements did not support a confident after-the-fact solvency finding. Ratifying it anyway would have created a false record rather than fixed a real one, and would have left Amalia and Darius, as the directors who approved it, personally exposed if the company's finances were ever challenged.
4. Negotiated a repayment structure with the shareholders. Rather than leave the exposure sitting on the company's books indefinitely, the four shareholders who had received that dividend agreed to treat their share of it as a shareholder loan owing back to the company, repayable over eighteen months with interest. This didn't erase the six years the defect had existed, but it converted an open liability into a resolved, documented one.
5. Brought the corporate records current before valuing the company. With the minute book accurate and the flawed dividend addressed, an independent business valuator was engaged to set the company's current fair market value — a required step, since the entire point of a freeze is fixing the founder's shares at today's value.
6. Executed the freeze structure. Amalia's common shares were exchanged for a new class of fixed-value, retractable preferred shares set at the valuator's figure, carrying a modest fixed dividend rate. New common shares, worth a nominal amount today, were issued to Niloufar, positioning her to capture all future growth in the company. A new shareholders' agreement was put in place covering how Niloufar's shares would vest, how Amalia's preferred shares could eventually be redeemed, and how Darius's existing stake fit around the new structure.

The outcome

The freeze itself closed successfully. Amalia's ownership is now fixed at its current value, Niloufar holds real shares in the company she has spent two years learning, and future growth in the business will build her stake rather than adding to a tax bill Amalia would otherwise have faced on her own shares decades from now.

But the process was not free of cost, and the honest accounting matters here. Fixing six years of records took several extra months before the freeze could close, well beyond what Amalia had expected when she first asked for help. The four shareholders who had received the questionable dividend had to repay roughly $180,000 between them out of their own pockets, spread over eighteen months — money that had already been spent or reinvested years earlier and had to be found again. And while the corrective loan structure resolved the company's books, it did not retroactively guarantee that the original dividend could never be questioned by a creditor or tax authority looking back at that period; it simply replaced an undocumented gap with a clear, defensible paper trail and eliminated the ongoing exposure going forward. Ontario's Limitations Act, 2002 does put outer boundaries on how far back most claims can reach, which meaningfully reduces the practical risk with each year that passes, but it does not erase the fact that the defect existed.

Amalia's reaction, once the numbers were clear, was less relief than a kind of quiet frustration — the freeze had worked exactly as intended, but getting there had cost real money to fix a problem that two decades of otherwise careful business decisions had let slide. Darius, for his part, had not realized until the review that as a director he had been personally exposed the entire time a defective dividend sat undocumented on the company's books.

What you can learn from this