Estate Freeze Strategies for Business Owners in Ontario: Comprehensive Tax Planning Guide 2026

ByManan Patel

# Estate Freeze Strategies for Business Owners in Ontario: Comprehensive Tax Planning Guide 2026

For business owners in Ontario with growing enterprises, an estate freeze is one of the most powerful tax planning strategies available. By “freezing” the current value of your business interest and transferring future growth to the next generation, you can significantly reduce tax liability while maintaining control of your business during your lifetime.

By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA

Whether you operate a manufacturing company in Mississauga, a technology firm in the GTA, or a professional practice across Ontario, understanding estate freeze mechanics can save your family hundreds of thousandsor even millionsin future taxes. This comprehensive guide explores estate freeze strategies, implementation mechanics, and critical considerations for Ontario business owners.

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What is an Estate Freeze?

An estate freeze is a tax planning strategy that fixes (or “freezes”) the current fair market value of your business interest for tax purposes. All future appreciation in the business value accrues to designated beneficiariestypically your children or other family membersrather than continuing to accumulate in your estate.

Key Objectives of an Estate Freeze

1. Tax Mitigation: Limit your exposure to capital gains tax on death by capping the taxable value of your business interest at today’s value.

2. Wealth Transfer: Enable the next generation to benefit from future business growth without triggering immediate tax liability.

3. Control Retention: You maintain voting control and management authority over the business during your lifetime.

4. Estate Planning Certainty: Provides clarity and structure for intergenerational transition, reducing family disputes and succession uncertainty.

5. Income Splitting Opportunities: Create opportunities to distribute income to family members in lower tax brackets (subject to TOSI rules).

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Why Estate Freeze Matters in Ontario

Capital Gains Tax on Death

In Canada, death triggers a deemed disposition of all capital property at fair market value. For business owners, this means:

  • 50% of capital gains are taxable income in your terminal year
  • Combined federal and Ontario tax rate can reach 53.53% on the taxable portion
  • For a $5 million business, this could mean $1.3+ million in taxes due within months of your death

Without planning, these taxes can force a fire sale of the business or create significant financial hardship for your family.

The Lifetime Capital Gains Exemption (LCGE)

The LCGE ($1,016,836 in 2026) provides partial relief, but for most successful businesses worth several million dollars, this exemption covers only a fraction of the taxable gain. An estate freeze combined with LCGE utilization can dramatically reduce overall tax exposure.

Succession Planning in the GTA

In highly competitive markets like Mississauga, Toronto, and the broader GTA, business continuity depends on smooth succession transitions. Estate freezes provide the structural framework for orderly transfer of ownership while preserving family wealth.

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How an Estate Freeze Works: Core Mechanics

Basic Estate Freeze Structure

The most common estate freeze implementation involves a Section 86 share exchange:

1. Exchange Common Shares: You exchange your existing common shares (with all future growth potential) for fixed-value preferred shares equal to current fair market value.

2. Issue New Common Shares: New common shares (with nominal value) are issued to the next generation (often through a family trust).

3. Future Growth Accrues to New Common: All future appreciation in business value accrues to the new common shareholders, not to you.

4. You Retain Control: The preferred shares include voting rights and/or special rights that allow you to maintain control of the business.

Example: Mississauga Manufacturing Company

Before Estate Freeze:

  • Business value: $4 million
  • Your ownership: 100 common shares
  • Projected growth: $6 million in 10 years
  • Future tax on death (on $6M value): ~$1.6M

After Estate Freeze:

  • You exchange common shares for $4M in preferred shares (fixed value)
  • New common shares issued to family trust (nominal value)
  • Future growth ($2M) accrues to trust beneficiaries
  • Your tax on death: based on $4M (frozen value), saving ~$530K in taxes

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Common Estate Freeze Techniques in Ontario

1. Section 86 Share Exchange (Most Common)

How it works:

  • Exchange existing common shares for preferred shares on a tax-deferred basis under Section 86 of the Income Tax Act
  • Preferred shares have redemption value equal to FMV at freeze date
  • New common shares issued to next generation or family trust

Advantages:

  • Tax-deferred (no immediate tax liability)
  • Simple to implement
  • Maintains control via preferred share voting rights

Best for: Most Ontario business owners seeking straightforward estate freeze implementation.

2. Section 85 Rollover to Holding Company

How it works:

  • Transfer operating company shares to a new holding company under Section 85 rollover
  • Receive fixed-value preferred shares from Holdco
  • Holdco issues new common shares to next generation or trust

Advantages:

  • Adds asset protection layer (operating company liabilities separated)
  • Tax deferral on inter-corporate dividends
  • Facilitates income splitting (subject to TOSI)

Best for: Business owners seeking enhanced asset protection and holding company benefits alongside estate freeze.

3. Family Trust Estate Freeze

How it works:

  • Establish a discretionary family trust
  • Trust subscribes for new common shares (nominal value)
  • You retain preferred shares (frozen value)
  • Trust beneficiaries include children, spouse, possibly grandchildren

Advantages:

  • Flexibility: Trustee can distribute income among beneficiaries based on tax efficiency
  • Creditor protection: Trust assets generally protected from individual beneficiary creditors
  • Income splitting opportunities (subject to TOSI and kiddie tax rules)

Best for: Families with minor children, uncertain succession plans, or desire for distribution flexibility.

4. Reverse Estate Freeze

How it works:

  • The next generation subscribes for preferred shares with fixed value
  • You retain (or subscribe for) new common shares with growth potential
  • Less common but useful in specific circumstances

Advantages:

  • Allows younger generation to crystallize LCGE early
  • Appropriate when business value may decline or when next generation has significant capital to invest

Best for: Situations where next-generation family members have capital and business is at peak value.

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Step-by-Step Estate Freeze Implementation

Step 1: Business Valuation

Obtain a professional business valuation to establish fair market value at the freeze date. This is critical for:

  • Setting the redemption value of preferred shares
  • Ensuring CRA compliance
  • Providing documentation for future tax reporting

Valuation methods: Capitalized earnings, discounted cash flow, market comparables.

Step 2: Corporate Reorganization

Work with legal and accounting advisors to execute the reorganization:

  • Draft corporate resolutions and share amendments
  • Execute Section 86 exchange or Section 85 rollover
  • File election forms with CRA (e.g., T2057 for Section 86, T2058 for Section 85)

Step 3: Establish Family Trust (if applicable)

If using a trust structure:

  • Draft trust deed with appropriate discretionary provisions
  • Appoint trustee (often family member or professional trustee)
  • Define beneficiaries
  • Subscribe trust for new common shares

Step 4: Document and Report

  • File all corporate filings with Ontario Corporations Act compliance
  • File income tax elections within required deadlines (typically within tax filing deadline)
  • Update shareholders’ register and minute books

Step 5: Ongoing Compliance

  • Annual tax filings for family trust (T3)
  • Dividend policy compliant with TOSI rules
  • Regular valuations if subsequent transactions planned (e.g., redemptions)

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Tax Considerations for Ontario Estate Freezes

Capital Gains and LCGE Utilization

The estate freeze itself is typically tax-deferred, but you should consider:

1. Crystallizing LCGE First: Before freezing, consider triggering a capital gain up to your available LCGE limit to step up the adjusted cost base (ACB) of your shares.

2. Qualified Small Business Corporation (QSBC) Status: Ensure your company qualifies for LCGE by meeting the QSBC criteria (e.g., 90% active business assets, Canadian-controlled).

3. Two-Year Holding Period: Shares must be held for 24 months before sale to qualify for LCGE, and the corporation must meet asset tests.

Tax on Split Income (TOSI) Rules

The TOSI (or “kiddie tax”) rules can limit income splitting benefits from estate freezes:

  • Under Age 18: Most dividends and capital gains taxed at top marginal rate (~53%)
  • Ages 18-24: TOSI applies unless certain exceptions met (e.g., actively engaged in business 20+ hours/week on average)
  • Age 25+: Broader exceptions available, including “excluded shares” if certain conditions met

Planning Tip: Structure estate freeze to ensure next-generation shareholders meet TOSI exceptions, or accept that income will be taxed at higher rates until criteria met.

Attribution Rules

Be cautious of attribution rules under the Income Tax Act:

  • Section 74.1: Income from property transferred to spouse attributed back to transferor
  • Section 74.3: Capital gains on property transferred to minor children attributed back

Solution: Use fair market value consideration (e.g., promissory note) for any transfers, or ensure transactions are at arm’s length.

Dividend vs. Capital Gains Treatment

Post-freeze, growth shareholders may realize gains as:

  • Dividends (if preferred shares redeemed incrementally or company pays regular dividends)
  • Capital gains (if shares sold to third party or on winding-up)

Planning Tip: Capital gains treatment often more favourable due to 50% inclusion rate and potential LCGE access. Structure exit strategy accordingly.

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Estate Freeze Considerations for Different Business Stages

Early-Stage / High-Growth Businesses

Challenge: Business value is low now but expected to appreciate significantly.

Strategy:

  • Freeze at current low value to maximize future tax savings
  • New common shares to next generation or trust capture all appreciation
  • Consider multiple freezes as business grows (though administratively complex)

Mature / Stable Businesses

Challenge: Business value is already significant; further appreciation may be modest.

Strategy:

  • Estate freeze still beneficial to cap tax exposure at current value
  • May combine with gradual share redemptions to provide retirement income
  • Use holding company structure for tax-efficient dividend flow

Pre-Sale Businesses

Challenge: Business may be sold within 5-10 years; succession planning needed.

Strategy:

  • Estate freeze allows next generation to benefit from sale proceeds (capital gains to them, not your estate)
  • Structure to ensure LCGE available to all shareholders
  • Consider partial freeze if you want to retain some upside

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Holding Company Benefits in Estate Freeze Planning

Why Use a Holding Company?

1. Asset Protection: Operating company liabilities and risks separated from investment assets held in Holdco.

2. Tax Deferral: Dividends from operating company to Holdco are tax-free under inter-corporate dividend rules.

3. Income Splitting: Holdco can pay dividends to family members (subject to TOSI rules) in lower brackets.

4. Estate Freeze Layer: Holdco structure allows multi-level freeze (e.g., freeze Holdco shares while Opco continues to grow).

5. Creditor Protection: Investment assets held in Holdco generally protected from operating company creditors.

Typical Holding Company Structure

  • You: Preferred shares in Holdco (frozen value)
  • Family Trust: Common shares in Holdco (growth)
  • Holdco: Owns 100% of Opco common shares
  • Opco: Operating business (e.g., manufacturing, consulting, real estate)

This structure provides maximum flexibility for tax planning, income splitting, and asset protection.

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Reversing or Unwinding an Estate Freeze

Sometimes circumstances change and an estate freeze is no longer optimal. Reasons might include:

  • Business value declines below freeze value
  • Next generation not interested in business succession
  • Family disputes or changes in family dynamics
  • TOSI rules make income splitting less effective

Unwind Strategies

1. Reverse Section 86 Exchange: Exchange preferred shares back for common shares (often triggers tax, so evaluate carefully).

2. Redemption of Preferred Shares: Redeem frozen preferred shares incrementally (triggers dividend income).

3. Section 86 Rollover Again: Re-freeze at a lower value if business declined.

Important: Unwinding often has tax consequences, so obtain professional tax advice before proceeding.

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Common Estate Freeze Mistakes to Avoid

1. Freezing Too Early

If your business is still in high-growth phase and you’re actively involved, freezing too early means you miss out on appreciation personally. Consider delaying until closer to retirement or semi-retirement.

2. Inadequate Valuation

Using an outdated or unsupported valuation can trigger CRA challenges, especially if the freeze value is artificially low. Always obtain a credible professional valuation.

3. Ignoring TOSI Rules

Assuming dividend income to minor or adult children will automatically be taxed at their lower rates without considering TOSI exceptions is a common pitfall. Plan for TOSI compliance from the outset.

4. Failing to Update Shareholder Agreements

After an estate freeze, your shareholders’ agreement must reflect new share classes, voting rights, and succession terms. Failure to update can cause disputes and frustration.

5. Not Documenting the Freeze Properly

CRA requires proper documentation and timely election filing. Missing deadlines or failing to file can result in the transaction being fully taxable rather than tax-deferred.

6. Overlooking Voting Control

Ensure preferred shares issued to you include sufficient voting rights to maintain control. Otherwise, you may inadvertently cede control to the next generation before you’re ready.

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Estate Freeze and Life Insurance

Many estate freeze plans include life insurance to provide liquidity for:

1. Paying Capital Gains Tax: On frozen preferred shares at death, capital gains tax is still payable (though capped).

2. Equalizing Estate: If some children are active in the business and others are not, insurance proceeds can equalize inheritances.

3. Funding Share Redemptions: Insurance proceeds can fund buyout of non-active family members.

Typical Life Insurance Structure

  • Life insurance policy owned by Holdco or personally
  • Death benefit used to redeem preferred shares or pay estate taxes
  • Capital dividend account (CDA): Death benefit paid tax-free to CDA, then distributed to shareholders tax-free

Planning Tip: Work with an estate planning CPA and insurance advisor to integrate insurance with your estate freeze strategy.

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FAQs: Estate Freeze Strategies

1. What is the ideal time to implement an estate freeze?

The ideal time is when your business has significant future growth potential but before the value becomes extremely large. Typically, business owners freeze between ages 50-65, balancing current value against expected appreciation and retirement timing.

2. Can I reverse an estate freeze if circumstances change?

Yes, estate freezes can be reversed or unwound, but this often triggers tax consequences. Options include redeeming preferred shares (dividend income) or exchanging back to common shares (potential capital gains). Consult your CPA before unwinding.

3. How does an estate freeze interact with the Lifetime Capital Gains Exemption (LCGE)?

An estate freeze does not use up your LCGE. In fact, many estate freeze plans include a step to crystallize your LCGE first by triggering a capital gain up to the exemption limit, then freezing at the stepped-up value. The next generation can also use their LCGE on future gains.

4. Do estate freezes work for professional corporations (doctors, dentists, lawyers)?

Yes, professional corporations in Ontario can implement estate freezes, subject to professional regulatory rules. For example, Ontario physicians can use holding companies and family trusts alongside their professional corporation, though non-licensed individuals cannot own professional corp shares directly.

5. What are the costs to implement an estate freeze in Ontario?

Costs vary based on complexity but typically include:

  • Business valuation: $5,000 – $15,000+
  • Legal fees (corporate reorganization): $5,000 – $20,000+
  • Accounting fees (tax planning, elections): $3,000 – $10,000+
  • Trust setup (if applicable): $2,000 – $5,000+

Total: $15,000 – $50,000+ depending on business size and complexity. This investment can save hundreds of thousands or millions in future taxes.

6. How do TOSI rules affect estate freeze planning?

TOSI (Tax on Split Income) rules can limit the benefit of distributing dividends or capital gains to family members. To avoid TOSI:

  • Ensure adult children (25+) meet “excluded shares” criteria (e.g., own 10%+ votes/value, or business earns <90% from services)
  • Have adult children (18+) work 20+ hours/week in the business on average during the year
  • Accept that income to minors (<18) and some young adults (18-24) may be taxed at top rates

Planning should incorporate TOSI compliance from the outset.

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How Insight Accounting CPA Can Help with Estate Freeze Planning in Ontario

At Insight Accounting CPA, we specialize in estate freeze strategies and business succession planning for Mississauga, GTA, and Ontario business owners. Our services include:

Estate Freeze Planning & Implementation

  • Comprehensive review of your business structure, succession goals, and family circumstances
  • Design of optimal estate freeze strategy (Section 86, Section 85, family trust, or hybrid)
  • Coordination with legal counsel for corporate reorganization

Business Valuation Services

  • Professional business valuations compliant with CRA requirements
  • Valuation support for estate freeze, shareholder agreements, and succession planning

Tax Compliance & Elections

  • Preparation and filing of Section 86, Section 85, and other elections
  • Ongoing tax compliance for family trusts, holding companies, and operating entities
  • TOSI planning and documentation

Succession Planning Integration

  • Integration of estate freeze with broader succession and retirement planning
  • Shareholder agreement review and update
  • Life insurance planning coordination

Ongoing Advisory

  • Annual reviews to assess if estate freeze remains optimal
  • Adjustments for changing family circumstances, TOSI rules, or business performance
  • Proactive tax planning to maximize lifetime capital gains exemption and minimize tax

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Conclusion: Secure Your Family’s Financial Future with Estate Freeze Planning

An estate freeze is one of the most powerful wealth preservation and succession planning tools available to Ontario business owners. By freezing your business value today and transferring future growth to the next generation, you can:

  • Save hundreds of thousands or millions in capital gains taxes
  • Maintain control of your business during your lifetime
  • Enable smooth succession to family members
  • Provide income splitting opportunities (subject to TOSI compliance)
  • Protect family wealth for future generations

Whether you operate a technology startup in Mississauga, a professional practice in Toronto, or a family business across the GTA, estate freeze planning should be a core component of your tax and succession strategy.

Ready to explore estate freeze options for your business? Contact Insight Accounting CPA today for a confidential consultation. Our experienced team will assess your unique situation and design a tailored estate freeze strategy that preserves your wealth and secures your family’s financial future.

(905) 270-1873
www.insightscpa.ca
info@insightscpa.ca

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By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA

*Bader A. Chowdry is a licensed CPA and founder of Insight Accounting CPA Professional Corporation, serving business owners across Mississauga, GTA, and Ontario. With expertise in tax planning, succession planning, and business advisory, Bader helps entrepreneurs preserve wealth and transition businesses to the next generation.*

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About Insight Accounting CPA

Insight Accounting CPA Professional Corporation provides comprehensive accounting, tax, and advisory services to businesses and high-net-worth individuals across Mississauga, Toronto, and the Greater Toronto Area. Our services include estate freeze planning, succession planning, tax compliance, business valuation, and fractional CFO services.

Accounting Intelligence Strategic financial guidance powered by expertise and innovation.

Learn more at www.insightscpa.ca or call (905) 270-1873.

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