Page 167 - A Canuck's Guide to Financial Literacy 2020

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Estate Freeze

Upon death, a taxpayer is deemed to have sold of all of their property at fair market value
thus resulting in a tax liability. This is known as a deemed disposition. Estate freeze is an
estate planning tool where the growth of appreciating assets are frozen in such a way that a
deemed disposition does not occur and any future growth of assets accrues to the next
generation of family members. The most common method of an estate freeze is a Section
85 freeze.

Section 85 Freeze

Section 85 is a provision of the Income Tax Act that that involves transferring assets of
value into a corporation and receives shares in return. It allows for a tax-free rollover
meaning that no deemed disposition or realized gains occur. Through this provision, you’re
able to achieve estate freeze as discussed below.

The transferor would be transferring assets to the operating company and in return would
receive preferred shares. In order for the transfer to be valid, the preferred shares must be
of equal value of the assets transferred in. The value of these assets would be considered
frozen in these preferred shares.

Subsequently, common shares would be issued to a trust which could include family
members of the transferor as beneficiaries. Any future growth of the assets in the
corporation will be reflected in the common shares which would be attributed to the
beneficiaries