The estate freeze

An estate freeze will allow you to take the value

of your business today, and capture or “freeze” that
value in a single class of shares that you will own.
Then, new common shares in the company will be
issued for a nominal amount (i.e. $100) to your
successors where you can identify them, or to a trust
when you’re not yet sure who will ultimately take
over the business. The future growth of the business
will accrue to the new common shares issued to the
successors or the trust, as the case may be. Consider
Jack’s example.
Jack owns 100 per cent of a construction company
that he started many years ago that is now worth
$3 million. He wants his son Greg to own 40 per
cent of the business – and to eventually take over
the entire business. Jack completed a freeze to
accomplish this. Here is how: Jack exchanged his
common shares worth $3 million for new special
shares that are also worth $3 million, but are frozen
in value. That is, he “captured” the full value of the
company in a new class of special shares (typically, Pass the tax
these are preferred shares). The company then issued bill on future
new common shares to both Jack and Greg. Greg growth to
received 40 per cent of the new common shares, someone
while Jack took the remaining 60 per cent. Greg will else.
now enjoy 40 per cent of all future growth in the
company.
In this situation, there are no adverse tax
consequences to Jack. Greg now owns 40 per cent of
the future growth of the business. Jack can redeem
(sell back to the company) his common shares and
special frozen shares over time if he wants. This will
provide income to Jack in retirement, and will, over
time, pass more ownership and voting control of the
company to Greg.

Enhanced capital gains exemption

If you own shares in a “qualified small business
corporation” (QSBC) or qualified farm property,
you may be entitled to shelter up to $500,000 of

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 capital gains on those assets from tax. As part of any
proper succession plan, it makes sense to use this
exemption. There are two scenarios in which you will
be able to use the exemption. The first is where you
sell your QSBC shares or farm property to an outside
party. In this case, the first $500,000 of capital gains
You could will be sheltered from tax.
shelter up to The second case is where you take steps to
$500,000 of “crystallize” $500,000 worth of gains on the shares
your small or property without actually selling them to someone
else. By “crystallizing,” we mean that you will be able
business
to use the exemption today to increase the adjusted
or farm cost base of your QSBC shares or farm property by
property. the $500,000 exemption (or part thereof) without
actually giving up control of the business or farm
today. This way, when you eventually sell the shares
or farm property, or upon your death, the taxable
capital gain triggered will be lower (a higher adjusted
cost base results in a lower taxable gain).
Not all shares or farm properties will qualify for
the exemption. A tax professional can provide advice
on whether you qualify to claim the exemption, and
what you can do to qualify if you do not currently
qualify.

Capital gain rollover

Thanks to the 2000 and 2003 federal budgets,
it may be possible to dispose of your shares in your
small private company and defer the tax on any
gain by reinvesting the proceeds in the shares of
another small business corporation. There are a
number of conditions that must be met to qualify for
this capital gain rollover. This rollover can provide
a simple solution to the business owner looking to
exit one business but enter another. Speak to a tax
professional for the details.

Family farms
Normally, a transfer of business assets or shares
from you to another family member (except your

62 Chapter 8: Business Succession Planning

 spouse) is treated as a disposition at fair market
value. Farming businesses, however, are entitled
to some tax breaks that other businesses are not.
Specifically, property that is used in an active farming
business can be transferred to your spouse, child,
grandchild, or great-grandchild at your adjusted cost
base. The result? No capital gains are triggered on the
transfer. The heir of the property will inherit your
adjusted cost base so that tax may be paid eventually
on the gain.
In addition to this inter-generational tax free
transfer of farm property, you’ll be able to shelter up
to $500,000 of capital gains on the disposition of
qualified farm property using the enhanced capital
gains exemption discussed earlier. Property used
in an active farming business and farm quotas can
qualify for the exemption.

Capital gains reserve

There is a general capital gains reserve that is
available when you have sold something at a gain
and have not yet collected the entire proceeds of
disposition from the buyer. The rules work so that
you’re able to spread the capital gain out over a period
as long as five years. The news is even better in the
case of shares in a small business corporation or
certain farm property. In this case, the capital gain can
be spread out over a period as long as 10 years when
Farming
the sale is to a child, grandchild, or great-grandchild. businesses
This 10-year reserve is not claimed very often – only are entitled
because transfers to a child are usually made by way to special tax
of a freeze. If, however, you think a sale to your child is breaks.
appropriate, this 10-year reserve could defer tax.

The contents of this chapter were adapted from: Tim Cestnick, Winning
the Estate Planning Game, (2001), (Toronto: Prentice Hall), Chapter
8. Copies of Winning the Estate Planning Game are available at www.
timcestnick.com.

Chapter 8: Business Succession Planning 63