Lots of business owners implemented estate freezes several years ago, when business values rose rapidly. If you opted for this tactic, you most likely exchanged your common shares for preferred shares (commonly called “freeze” or “frozen” shares) that had a fair market value equal to that of the exchanged common shares. New common shares, meanwhile, were issued either to family members or to a family trust.
Simple enough, but it gets a bit more complicated.
If you’re in a situation where some, but not all, of your children are actively involved in the business, you might wonder what to do with the freeze shares for estate planning purposes. Canadian tax authorities require freeze shares to remain redeemable at the shareholder’s option for an amount equal to the fair market value of the exchanged common shares. And, if freeze shares are transferred to any children not actively involved in the business, the owner can’t preclude the children from requiring the corporation to redeem those shares immediately.
Read: Perils of joint ownership
So, to whom should you transfer the freeze shares? It depends on your intended outcome, but you have to weigh your wishes against some potential negatives. Here’s an outline of the pros and cons, broken down by potential recipient of the freeze shares.
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Spouse |
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Testamentary Spousal Trust |
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Children not actively involved in the business |
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Children involved in the business |
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Discretionary Testamentary Family Trust |
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