Estate Freezes in Canada | Section 85 & 86 Planning

Why estate freezes matter

When a business owner dies, CRA treats their shares as if they were sold at fair market value on the date of death. This deemed disposition can trigger a significant capital gains tax liability — one that must be paid by the estate, often without a corresponding cash inflow to cover it.

An estate freeze addresses this by exchanging the owner's common shares for fixed-value preferred shares. The current value is "frozen" and any future appreciation flows to new common shares held by family members, trusts, or the next generation. The result: the tax liability on death is capped at today's value rather than growing with the business.

Example: A business worth $5M today could be worth $15M in 20 years. Without a freeze, the deemed disposition on death applies to the full $15M — at the 50% inclusion rate and top combined marginal rates (~53%), that's roughly $3.98M in capital gains tax on the terminal return. With a freeze executed today, the owner's deemed disposition is capped at $5M — approximately $1.33M in tax. The $10M of future growth is taxed in the hands of the next generation, potentially at lower rates or sheltered by their own LCGE.

If the freeze is combined with LCGE crystallization (~$1,275,000 for 2026), the owner's taxable gain drops further — potentially saving an additional $338,000 per person.

How an estate freeze is implemented

The Income Tax Act provides three mechanisms for implementing an estate freeze. The right choice depends on whether you want to crystallize the LCGE, whether conversion rights already exist in the share terms, and how complex the overall plan needs to be.

Section 85 Rollover

A tax-deferred transfer of shares to the corporation in exchange for preferred shares, using a joint election filed on Form T2057.

Most flexible method — allows the freezor to choose an "elected amount"
The only method that permits LCGE crystallization at the time of the freeze
Requires a joint election filing with CRA
Preferred choice when tax planning is a priority

Section 86 Reorganization

A share exchange where existing common shares are converted into preferred shares as part of a reorganization of share capital.

Simpler than Section 85 — no election filing required
Tax-deferred when properly structured
Does not allow LCGE crystallization at the freeze date
Common for straightforward freezes where LCGE has already been used

Section 51 Conversion

A conversion of shares from one class to another, based on a conversion right in the articles of incorporation.

Requires conversion rights in the share terms (can be added by amendment)
Simplest method when those rights are in place
Tax-deferred exchange
Often used alongside Section 85 or 86 as part of a broader plan

What goes into a well-structured freeze

An estate freeze is more than a share exchange. Done well, it's a coordinated plan that accounts for your current tax position, family dynamics, control preferences, and long-term goals.

Independent business valuation

The freeze price must reflect the fair market value of the business at the time of the freeze. If CRA later challenges the value, the entire freeze — and the tax planning built on top of it — can unravel. An independent valuation prepared by a chartered business valuator provides the defensible foundation the freeze requires.

Preferred share terms

The design of the preferred shares matters. Retractable, redeemable, voting, and dividend rights all need to be considered carefully. These terms affect control, access to corporate funds, and the tax treatment of future transactions.

New common share structure

Who receives the new common shares — and how — has significant implications. Shares can be issued to family members directly, held through a family trust, or structured to accommodate future changes in the family or business. If a family trust is used, keep in mind the 21-year deemed disposition rule — the trust will be treated as having sold and reacquired its assets at fair market value every 21 years, which needs to be factored into the long-term plan.

LCGE planning

A freeze can be combined with crystallization of the Lifetime Capital Gains Exemption (~$1,275,000 for 2026, indexed annually, for qualifying small business shares) to shelter a portion of the frozen value from tax. Crystallization requires a Section 85 rollover — Section 86 does not allow it — and must be done at the time of the freeze to be effective.

When to consider an estate freeze

There's no single trigger, but common situations include:

The business has appreciated significantly and you want to cap your personal tax exposure
You're beginning to plan for retirement or transition
Adult children are becoming involved in the business
Your accountant or lawyer has raised succession planning as a priority

A freeze doesn't have to be permanent. If the business declines in value after the freeze, a "thaw and re-freeze" at the lower value can reduce the owner's eventual tax liability. Conversely, if circumstances change — new shareholders, a revised succession plan — the freeze can be restructured.

How we support estate freezes

We provide the independent business valuation that anchors the freeze, and coordinate the tax planning and legal implementation from start to finish — so nothing gets handed off between firms.

If you already have a lawyer or accountant you'd prefer to work with, we integrate with your existing team. All valuations are prepared by chartered business valuators in accordance with CBV Institute professional standards.

Last reviewed: April 2026

Estate Freezes