October 1998 volume 2, issue 3 

The value of your estate goes two places when it is passed on: your beneficiaries and the Canada Customs and Revenue Agency. In order to maximize the amount going to those you choose, and minimize the amount going to Canada Customs and Revenue Agency, it is important to undertake a process of estate planning. If you own a successful small business or other assets which are continually appreciating in value, an estate freeze is a fundamental tool for ensuring your beneficiaries receive their intended share without losing significant amounts to taxation.

A Time-Tested Technique
The estate freeze is a well-known and often-used technique of estate planners. At its root, an estate freeze allows the value of an asset to be "frozen" at its current value, and to attribute all further increases in value to your beneficiaries, either directly or via a trust.

Start Planning Now
With the Report of the Technical Committee on Business Taxation recommending to Parliament that the enhanced lifetime capital gains exemption for small business corporations and farm property be eliminated, there is no time like the present to begin the process of estate planning.

Minimizing Your Own Assets
In Canadian taxation law, an individual's estate is assessed and taxed at the fair market value at the time of death. This is known as "deemed disposition", and can lead to a significant tax bill on one's final return. In the case of a business that has continued to grow in value over the course of one's life, it is best to start planning early to avoid losing a large portion of what you have worked hard to earn for your family and beneficiaries.

Freezing Value at Current Levels
If you have reached a stage in your financial life where you have a comfortable level of income, but your business is continuing to grow, an estate freeze fixes the value of the company at its current level. This is often accomplished through the creation of preferred shares in the company. These shares would have a fixed value based on current fair market value. At the same time, the company would issue common shares (for a nominal cost) to the intended beneficiaries. At the time of issue these shares would have no value, but as the company grows, all appreciation would be attributed to these common shares.

A Flexible Planning Option
An estate freeze does not require you to give up control of your assets, nor does it lock you into a fixed income for the rest of your life. In fact, you do not even need to name specific beneficiaries at the time of your estate freeze. What the freeze achieves is a cap on your capital gains for your terminal return. In the case of assets which end up declining in value, it is possible to refreeze these at their new levels to more accurately reflect their value.

Many Advantages for Estate Planning
An estate freeze opens up a large number of estate planning options to you. Because you will be dealing with a known, fixed value for your major assets, all future planning can take place based on a known position. Properly planned, your assets can be virtually eliminated at death, minimizing the tax your estate will owe. Other important considerations like life insurance can be dealt with accurately once the state of your assets can be predicted.

Not a Risky Procedure
Estate freezes rely on using well-established corporate reorganization rules to achieve tax savings, rather then relying on ever-changing taxation laws. Therefore, the procedure does not put you at risk of reassessment by the Canada Customs and Revenue Agency, as long as all the complexities of the corporate law have been properly acknowledged and followed. The process will involve both your CA and your lawyer, and the costs of undertaking an estate freeze must be compared to the potential savings before getting started.

Sound Professional Help is Required
At Wilkinson & Company LLP, we have successfully completed hundreds of estate freezes for family-owned enterprises. We have significant expertise in all the detailed areas of carrying out an estate freeze and, equally important, we have the professional skill to communicate your estate plan to the other professionals (lawyers, insurance agents, etc.) who will be required to properly execute your plan.

More Than a Financial Decision
Estate planning encompasses more than just number-crunching. A skilled estate planner will be very familiar with you financial affairs and can help you plan around particular family, interpersonal, and social situations. Ensuring that your estate plan is clear, concise, and an accurate reflection of your wishes is a crucial part of an estate freeze. The options available can be arranged to best suit your needs and those of the people you choose to name as beneficiaries.

The Start of an Important Process
At Wilkinson and Company LLP, we know that an estate freeze is just the start of a comprehensive succession plan. We can help you maintain and enjoy the lifestyle you have earned for yourself, while taking care of those who follow you. In keeping with the old adage, "A dollar of tax deferred is a dollar of tax saved", an estate freeze can help to ensure that your loved ones and beneficiaries receive the most generous share possible of your estate.

Brian Kehoe , CA, is a member of the Wilkinson Tax Group and completed the CICA In-Depth Tax Course in 1988. Brian has an area-wide reputation for developing creative methods of saving tax dollars for our clients through effective tax planning. As taxation rules become more complex, he offers indispensable support in dealing with Canadian and foreign taxation authorities.