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An estate freeze is typically used by parents who would like to freeze the current value of their growing incorporated assets and transfer the future growth of these assets to their children.

There are several methods available to accomplish an estate freeze. Although an estate freeze may turn into a complicated tax transaction, this Financial Planning Quick Tip only deals with the general aspects of an estate freeze.

A typical simple estate freeze would entail that the parent who owns the common shares of a growing company would exchange the common shares for preferred shares of equivalent value on a tax-deferred basis.

That's right, it is possible to exchange the parent's common shares that may have a large accrued gain for preferred shares without triggering the accrued capital gain now. The preferred share consideration received for the common shares usually has a stated value and would not grow in value in the future. The children would then subscribe for new common shares.

Future growth of the corporate assets would be reflected in the value of the new common shares now owned by the children. The following are possible advantages that may be accomplished by an estate freeze:

1. The parents may retain control over the corporation by receiving voting preferred shares in exchange for their common shares. The parents should ensure sufficient voting preferred shares are issued in order to retain their control;

2. The parents may ensure a regular income flow by receiving a dividend on the preferred shares;

3. If the shares are Qualified Small Business Corporation (QSBC) shares, the parent may trigger a gain now in order to apply the enhanced $750,000 capital gains exemption;

4. If the common shares continue to qualify as QSBC shares, the children receiving the new common shares may be able to utilize their own capital gains exemption as the shares grow in value;

5. If the parent has available capital losses from other transactions, the estate freeze may be structured in a way to realize capital gains on the common shares disposed of to offset available capital losses;

6. The parents can determine in advance the amount of capital gains that will be incurred on the shares upon their disposition or their death. The capital gain would be equal to the Fair Market Value of the shares exchanged less the ACB of the shares at the time of the estate freeze.

An estate freeze is a useful tool utilized to achieve various goals. However, there are complex rules such as the attribution rules, which may be triggered if the estate freeze is not completed properly. Professional advice should always be obtained when considering an estate freeze.

If you have any questions or require clarification of any of the issues discussed in this document, do not hesitate to give me a call.

Note: The material in this column is intended as a general source of information only, and should not be construed as offering specific tax, legal, financial or investment advice. Individuals should consult with their personal tax advisor, accountant, or legal professional before taking any action based upon the information contained in this column.

* David Konning is an investment and retirement planner at Royal Bank. If you would like to reach him, please e-mail him at David.Konning@rbc.com or phone 856-0406. Financial planning services and investment advice are provided by Royal Mutual Funds Inc., a member company under RBC Investments. Royal Mutual Funds Inc., Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities which are affiliated.