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If you’re a typical family business owner, you probably think you are in a never ending bliss of 12-hour days, 365 days a year.  This may even have been the reason you had kids—to take over the business.  The good news is that there is a light at the end of the tunnel.  Its called retirement.  Your retirement is possible by rearranging your corporate structure and passing the business on to whomever you want.  You may wonder how this miracle can be achieved and whether it can be done with the least amount of tax and without burdening your successor with a large cash payment.  All of this can be done through an “estate freeze.”

What is an estate freeze?

An estate freeze involves exchanging the common shares you presently hold in your company for shares of a different class that may be redeemed in the future. Your successor then subscribes for new common shares for a nominal amount with the result that the value of the company before the freeze is tied up in the redeemable shares you hold. Your successor will benefit from future profits and increases in the value of the company. You will be able to realize on your equity in the company by having the company redeem your shares.  It is possible to arrange for a partial estate freeze to allow you to continue to exercise some control over your company.

How can you benefit from an estate freeze?

There are many advantages to an estate freeze.  Not only does it allow for an orderly and planned transfer of the business to the successor, but it also provides a structure by which you can recover your equity in the business and plan for your income tax liability.  Also, you do not need a complicated holding company structure which leads to less administrative costs.  However, in saying that, a holding company helps relieve the worry of the freeze becoming taxable in your hands if the business does not retain its qualifying small business status at all times after the freeze.

Can the business survive without you?

A freeze may also allow for you to continue to exercise some control over the company to add some comfort that the business can generate enough profit to redeem your preferred shares.  The freeze can be structured in such a way that you can retain voting rights over the operations.  Partial freezes are desirable in these circumstances.  All in all, an estate freeze is quite flexible to meet each individual’s specific situation.

Estate freeze traps

Some estate freeze traps to watch out for include:

• Ensure that you receive fair market value for your equity in the company.
• Consider whether your successor(s) is capable of running your company without your active participation.
• If the company, at some future time, no longer qualifies as a small business corporation (as defined for income tax purposes) there can be negative income tax consequences for you.
• your successor may encouter marital problems or personal financial problems which could have an impact on the business.

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