Estate Freeze Ontario — Section 86 Mechanics 2026
Quick answer (49 words)
A Section 86 estate freeze converts your common shares of an operating corporation into fixed-value preferred shares (worth what the corp is worth today) and issues new common shares to your kids or a family trust. All future growth accrues to the new common shares — your kids, not you.
Author: Bader A. Chowdry, CPA, CA, LPA.
Why an estate freeze?
Three benefits stack:
- Cap your future tax bill. Your eventual capital gain on disposition (or deemed disposition on death) is limited to the value of your preferred shares — today's value, not whatever the corp is worth in 30 years.
- Pass future growth to next generation. New common shares (worth $0 today) issued to kids or a family trust capture all subsequent appreciation.
- Maintain control during transition. Your preferred shares typically retain voting control while you're alive, so you keep operating control during the transition years.
The 5 mechanical steps
- Valuation. Get a professional business valuation (Chartered Business Valuator typically) determining today's FMV of the corp.
- New articles / amendments. Lawyer drafts new share class structure: existing common shares converted to fixed-value preferred (worth FMV today); new growth common shares (no par, no value today).
- Section 86 reorganization. All your existing common shares are exchanged for the new preferred shares. Section 86 is automatic (not an election) — but conditions must be met.
- Issue growth common shares. Issue new common shares to your kids or to a family trust at nominal value (e.g., $1 each).
- Document everything. Corporate minutes, share register, share certificates, valuation report, and a tax memo for the file.
The Section 86 conditions
For Section 86 to apply automatically:
- The corp must be a Canadian corporation.
- All shares of the relevant class held by the taxpayer are exchanged.
- The taxpayer receives shares of another class of the corp (no boot, or limited boot — boot triggers gain).
- The exchange occurs as part of a reorganization of the corp's capital.
If conditions fail, Section 86 doesn't apply and you have a deemed disposition at FMV, full capital gain triggered. Common failure: receiving any cash or non-share consideration ("boot").
Valuation, get this right or pay later
The preferred shares must be issued at the corp's fair market value today. Two risks:
- Undervalued freeze: if you assign too low a value to preferred shares, the new common shares carry too much "transferred value", CRA can reassess as a gift to your kids (deemed disposition at FMV).
- Overvalued freeze: less common but happens, CRA reassesses the share value upward and the freeze becomes ineffective.
Get a Chartered Business Valuator (CBV) opinion. Fee: $5,000-$15,000 typically. The CBV report is your CRA-defense evidence.
Family trust integration
A common structure is to issue the new common shares to a family trust rather than directly to children. Why:
- Flexibility. Trust can allocate dividends and gains to different beneficiaries (subject to TOSI).
- Capital appreciation flow-through. Trust beneficiaries can use the LCGE on the eventual sale of growth shares (each beneficiary gets their own $1,275,000 LCGE).
- 21-year rule planning. Trust must be planned around the 21-year deemed-disposition rule.
- Creditor protection for beneficiaries.
The cost of setting up a family trust at the same time as the freeze: $10,000-$25,000 additional (lawyer + CPA combined).
Total cost of an estate freeze
| Item | Cost |
|---|---|
| Lawyer (articles amendments, share certificates, minutes) | $5,000-$15,000 |
| Chartered Business Valuator (CBV) opinion | $5,000-$15,000 |
| Insight Accounting CPA (Section 86 reorganization, family trust setup, post-freeze adjustments) | $15,000-$50,000 |
| TOTAL | $25,000-$80,000 one-time |
For a freeze on a corp worth $5M-$25M, this is a 0.1%-1% one-time cost saving 25%+ on the eventual capital gain attributable to future growth, a 25-250x ROI over the life of the freeze.
FAQ, Estate Freeze (2026)
Q: When should I do an estate freeze?
A: When you've built up corporate value, have adult children (or a family trust ready to receive shares), and want to cap your future tax bill while passing growth to next generation. Common timing: age 50-65 for owner-managers with $5M+ in corporate value.
Q: Does Section 86 require an election?
A: No, Section 86 applies automatically if conditions are met (Canadian corp, exchange of all shares of relevant class, no excessive boot, reorganization of capital). But all the documentation, valuation, and corporate minutes must support the conditions.
Q: Can I receive cash in a Section 86 freeze?
A: Limited boot is allowed but triggers gain on the boot received. Most freezes structure as pure share-for-share exchanges (no boot) to defer all gain.
Q: How much value should the preferred shares be?
A: Equal to the corp's fair market value today, supported by a Chartered Business Valuator (CBV) opinion. Get this wrong and CRA can reassess.
Q: Should the new common shares go to my kids directly or to a family trust?
A: Family trust is usually preferred for flexibility (multiple beneficiaries, allocation of capital gains, LCGE per beneficiary, creditor protection). Direct to kids is simpler but less flexible.
Case study: Mississauga family medical practice incorporation
The challenge. A Mississauga-based family physician with $385K gross billings was paying $108K in personal income tax under sole-proprietorship status, with no income-splitting capability and shrinking RRSP room.
What we did. We incorporated her practice as a Medical Professional Corporation, structured share classes for future estate freeze, and added her physician spouse as a TOSI-excluded discretionary dividend shareholder.
The result. Annual tax savings: $28K. Cumulative 10-year projected savings: $310K. RRSP room maximized.
"Most CPAs incorporate and stop. The TOSI optimization and pre-positioning for the eventual practice sale is where real money compounds.", Bader Chowdry, CPA, CA, LPA
Most CPAs treat tax planning as annual paperwork. We treat it as a 25-year compounding strategy, every decision today affects retirement, succession, and the eventual sale.
, Bader Chowdry, CPA, CA, LPA
Try our free Insight Accounting CPA tools
| Tool | What it does |
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| Salary vs Dividend Optimizer 2026 | Calculates tax-optimal salary/dividend mix for incorporated owners |
| LCGE Calculator 2026 | Estimates Lifetime Capital Gains Exemption claim on a future sale |
| Incorporation Savings Calculator | Compares sole-prop vs incorporated tax outcomes |
| CRA Letter Decoder | Translates a CRA letter into plain English + recommended next steps |
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This article is for general informational purposes only and is not tax, legal, or accounting advice. Information current as of 2026-05-01 under Canadian and Ontario tax law. Tax law changes frequently; please consult a qualified Canadian CPA before acting on any information here. Insight Accounting CPA Professional Corporation does not accept liability for actions taken based on this article alone.
Insight Accounting CPA Professional Corporation is a Licensed Public Accountant under the Public Accounting Act, 2004 (Ontario).
