2004 Estate Freezes What are they & how do they work?

2004 What is an Estate Freeze? It is a transaction that allows you to exchange shares that are increasing in value for shares and other assets that are fixed in value

2004 Benefits of an Estate Freeze Control assets during life Transfer assets without immediate tax liability Shift increase in asset value and associated tax liability to next generation Create an income stream Creditor protection

2004 Benefits of an Estate Freeze Income splitting Crystallization of capital gains exemption Purification of assets (QSBC test) Multiply capital gains exemption Provide inheritance for family

2004 Without an Estate Freeze Example:  Father (45) has company with a FMV of $5,000,000  ACB is $0  Eligible for $500,000 capital gains exemption  Father marginal tax rate is 50% $1,125,000  His tax liability at death : $1,125,000

2004 Additional assumptions:  Father continues for 15 years, without an estate freeze  Father now aged 60  Business has doubled, FMV $10,000,000  Father dies age 60: $1,125,000$2,375,000Capital gains tax liability, business asset, has increased from $1,125,000 to $2,375,000 Without an Estate Freeze

2004 $1,125,000With estate freeze at 45, tax liability at 60 would have remained at $1,125,000. $1,250,000 ($2,375,000 – $1,125,000Excess $1,250,000 ($2,375,000 – $1,125,000 ) would pass to the next generation (children and grandchildren) Without an Estate Freeze

2004 Missed opportunities :  Income split (eg. dividends) with wife and children/grandchildren  Provide inheritance to family  Create a future income stream  Multiply capital gains exemption  Creditor proof corporation  Create a legacy that would remain in family Without an Estate Freeze

2004 OpcoOpco YOUYOU FamilyTrustFamilyTrust Beneficiaries children grandchildren Beneficiaries HoldcoHoldco Step 3, You transfer 100% preferred shares with FMV equal to value of common shares to newly incorporated holding company Step 1: Your exchange common shares of Opco for fixed value preferred shares of same value Step 2: New non-voting common shares would be issued to family trust Accomplishing an Estate Freeze Section

2004 Advantages  Can combine more than one asset/company in the transaction  Assists in creditor protecting  creates vehicle to receive tax-free intercorporate dividends  Provides flexibility if partial freeze intended Disadvantages  Somewhat complex  May complicate future share sale transactions Estate Freeze – Section 85

2004 Step 1: You exchange Opco shares for preferred shares Step 2: New non-voting common shares would be issued to family trust Accomplishing an Estate Freeze Section 86 OpcoOpco YOUYOU FamilyTrustFamilyTrust Beneficiaries children grandchildren Beneficiaries 2 Commons Preferreds

2004 Advantages  Simple  No additional corporate entity  Maintains existing structure Disadvantages  No creditor protection Estate Freeze – Section 86

2004 Estate Freeze – Summary Seriously consider when :  Limit/reduce/fix tax liability  Income splitting  Creditor protection  Purification of corporate assets  Multiply Capital Gains exemption  Keep maximum business value in family Failure to consider may cause problems if business owner dies or becomes disabled