An estate freeze is an effective mechanism used in estate and succession planning for owners of privately held corporations or for investors with investment portfolios. An estate freeze normally contemplates the current shareholder/owner being issued fixed value preferred shares in exchange for their existing shares followed by the issuance of new common shares which are anticipated to increase in value in the future to new shareholders, thereby shifting future growth away from the current owners. In many cases, the new common shares are issued to a family trust created at the time the estate freeze is implemented.
The Income Tax Act (Canada) provides that a trust is considered to dispose of all of its capital property owned on the 21st annual anniversary of the trust’s creation, thereby triggering the realization of any accrued capital gains on assets owned by the trust on the deemed disposition date. There are approaches that can be taken to mitigate or avoid the impact of the deemed disposition rules at the trust level.
In the current economic climate caused by the Coronavirus (COVID-19), a freeze may have been implemented in recent years which has now been followed by a decline in value of the corporation or investment portfolio, resulting in the corporation having a total value that is less than the value of the frozen shares issued to the freezer. As this decline in value is counterproductive to the desired objectives to be achieved by the estate freeze, a refreeze may be advisable resulting in the freezer owning new fixed value shares which have had their value reset to the current lower value of the corporation, allowing the growth in value to other shareholders to take place from a lower value starting point.
In the event that a refreeze transaction is being implemented, consideration should be given to creating a new family trust to subscribe for the new post refreeze common shares so that a fresh 21-year period of time is available prior to the next deemed disposition date.
Refreezing in the midst of this economic downturn can provide new and even more significant advantages from the estate freeze, including restarting the clock on the 21-year deemed disposition. A member of Miller Thomson’s tax group would be happy to discuss this with you.
Miller Thomson is closely monitoring the situation around the COVID-19 pandemic to ensure that we provide our clients with the appropriate support in this rapidly changing environment. For additional information, please see our COVID-19 resources page.