A man has built a company, currently worth $10 million and a sufficient nest egg. Though it will grow significantly in value by the time of his death, if he gives the company to his children at that time, they’ll have a steep tax bill. One-half of capital gains are taxable when capital properties are left to the next-in-line and Lanthier writes that “more than 25 per cent” of accrued capital gains would be owed on the death of a taxpayer in the top income bracket.
So, the man freezes the estate. First, he exchanges his $10 million in common shares for $10 million in preferred shares with a fixed redemption amount of $10 million, meaning the value of the preferred shares cannot eclipse $10 million.
In exchanging the common shares for preferred shares, the man secures $10 million but denies himself the gains produced as the company grows. The man’s children then purchase common shares — initially with zero value — in which that growth is captured.
The man continues to control the company and lives off the $10 million, while the company grows to $100 million and the common shares owned by the successors balloon in value. Without the freeze, that capital transfer would include a $25-million tax bill, but because of the freeze, no common shares are transferred when he dies and, according to Lanthier, that’s a tax savings of $20 million. The successors will pay capital gains tax but not until they dispose of their shares, which could be 40 years later, he says.
In an article for Canadian Accountant, tax specialist Kim Moody, director of Moodys Gartner Tax Law LLP, disagreed firmly. He writes: “Estate freezes should NOT be legislated out of existence. They are a very valuable tool to assist in legitimate succession planning.” Despite Lanthier’s “clickbait” headline, freezes are “not reserved for the rich” but used by the “average business owner,” writes Moody.