Skip to content Skip to footer

Loading Results

Freeze, sprinkle, multiply and waste — An estate planning recipe

If you could freeze your wealth to reduce the tax on your death but not affect your income, would you? Would you consider having your value frozen from a tax perspective but not from a wealth perspective?

A flexible estate freeze allows you to transfer the future growth in value of your business to future generations. The estate freeze effectively caps the value of your shares at the date of freeze, allowing future generations to come in at a nominal amount. Freezing your value today allows you to freeze your estate value and more effectively manage your date-of-death value and accompanying taxes.

An increasing number of shareholders are undertaking estate planning for this reason alone, but an estate freeze can offer other benefits too.

Most often, an estate freeze is set up when a parent is ready to transfer control to the next generation. As part of the business succession, the parent may decide to freeze their entitlement to the current value of the corporation, while allowing the corporation's future growth to accrue to another shareholder (or shareholders) or to a family trust.

An estate freeze defers to the next generation taxes on future increases in the value of the corporation and keeps the parent’s tax on death from growing.

Additional benefits of estate freezing are that it:

  • freezes value but keeps the parent’s control

  • sprinkles dividends among incoming shareholder(s)—typically the children

  • multiplies the lifetime capital gains exemption

  • wastes the “freeze value” over time effectively, reducing taxes due on the parent’s death on the shares that have been subject to the freeze

  • protects assets from creditors

We discuss the first four below. Although we assume that the parents are the current shareholders, these techniques can also work in other situations.


Many mechanisms can freeze an estate on a tax-deferred basis.

In the simplest case, the common shares a corporation are exchanged in a tax-deferred basis for fixed-value preferred shares (“frozen shares”) of the company. These preferred shares are redeemable (and retractable) at the fair market value of the company at the time of the exchange.

In effect, the shareholder limits his or her entitlement to that amount (upon redemption or cancellation of these shares). New common shares (“growth shares”) can then be issued for a normal amount.

In the context of a family business, the new common shares are typically subscribed for by the children directly or by a discretionary Family Trust created for the benefit of some or all of the children and, if desired, future generations.

Structured properly, a discretionary Family Trust can also give parents maximum flexibility by allowing them to be discretionary beneficiaries of the trust and to participate in future growth of the company through the Family Trust. That way, if the parents later find the value of their shares and inadequate for their needs, they will have access to the growth of the business after the freeze to maintain their lifestyle during retirement.

In summary, the estate freeze allows:

  • The future growth of the business to pass to the children or others
  • The parent(s) to continue to participate in the growth of the business, if the freeze is structured properly
  • The parent(s) to retain voting control of the corporation through the ownership of voting preferred shares or as a trustee of the Family Trust


The income of a corporation can be split by paying dividends to its shareholders—sprinkling value among recipients. Two basic approaches are available.

If the children hold the common shares directly, dividends paid on the shares will be taxed in the children's hands. The portion of the dividends paid to each child will be fixed based on their relative share ownership.

Alternatively, a discretionary family trust is a popular vehicle for holding the common shares to facilitate splitting income with family members. It offers the trustees the flexibility to “sprinkle” the dividends to accommodate changing needs of the beneficiaries.

Specifically, the trustees can vary the allocation of dividends among the beneficiaries from year to year, and the dividends will generally be taxed in the hands of the recipient beneficiaries rather than in the trust.

Dividends (both eligible and non-eligible) earned by the trust and taxable in the hands of the beneficiary will retain their character if paid or made payable to the beneficiary in the year received by the trust.

Income not paid or payable to the beneficiaries generally will be taxed in the trust at the highest marginal tax rate applicable to individuals who are resident in a trust’s province or territory of residency. Keep in mind though that the “kiddie tax” will apply to tax certain types of income received by a minor (i.e. a person under 18 years of age in the year) at the top marginal tax rate.

In addition, depending on the facts, the income attribution rules may apply to attribute income earned by the trust to the person who lent or transferred property to the trust, if one of the main purposes may reasonably be considered to be to reduce the transferor’s income and to benefit their spouse or minor child, niece or nephew.

If structured properly, dividend sprinkling can result in substantial savings.


An individual who is resident in Canada has a lifetime capital gains exemption (LCGE) on property that qualifies under the Income Tax Act.

Shares of a qualified small business corporation normally qualify. Having more than one shareholder of the business allows you to multiply the LCGE on the ultimate disposition of shares. The shares must meet certain criteria, including that they generally must be held for at least 24 months.

If a family trust is a shareholder, any capital gain on a disposition of the trust’s shares is realized in a family trust. But the trustees generally can pay or make payable the taxable portion (i.e. 50%) of the capital gain to one or more beneficiaries (regardless of age) and have it taxed in their hands.

The taxable capital gain so paid or payable retains its character, and to the extent that a beneficiary has unused LCGE, they may use it to shelter the taxable capital gain. The non-taxable portion of the capital gain can either be kept in the trust or distributed tax-free to capital beneficiaries.


Usually waste is something to avoid, but in an estate context, it refers to the gradual reduction in value of the parent’s preferred shares in the company as part of the plan: wasting the freeze.

Once a freeze is in place and a parent has fixed-value preferred shares, reducing the total fixed value of the preferred shares becomes important to decrease the taxes due on death. Typically some of the preferred shares are redeemed annually. Redeeming shares has two tax consequences:

  1. If all preferred shares are redeemed at once, the individual shareholder is liable for tax on a deemed dividend. If only some shares are redeemed, the deemed dividend and the tax owing both will be proportionately smaller.

  2. A capital gain or loss will arise. Handled properly, a capital gain can be beneficial. But typically a capital gain or loss won’t arise on the share redemption because the adjusted cost base and paid-up capital of the shares usually are equal, unless the shareholder acquired their shares from a previous shareholder.

The funds paid on the redemption of fixed-value preferred shares can provide the frozen shareholder (the parent) with sufficient income, allowing other remuneration, such as a salary income, to be reduced.

Other tax and non-tax considerations

Each estate freeze transaction must be customized to the specific situation and consider the needs and objectives of the parents and children, family dynamics, tax legislation and family law legislation. In the right circumstances, significant tax, personal and business benefits can be gained from the freeze, sprinkle, multiply and waste recipe. Your PwC Tax Advisor can help you take the best course of action.

Contact us

Jason Safar

Jason Safar

Private Tax Leader, Partner, PwC Canada

Tel: +1 905 815 6399

Sabrina Fitzgerald

Sabrina Fitzgerald

National Private Leader and National Capital Region Leader, PwC Canada

Tel: +1 613 898 2113