Business Valuation for Tax & Estate Planning

This blog post will discuss the concept of an estate freeze, which is a commonly used tax and estate planning tool. We will also discuss how an independent business valuation is an important part of that process.

What's an estate freeze?

Section 86 of the Income Tax Act allows for the tax-free exchange of shares in specific instances. It is commonly used for estate planning purposes. Section 86 generally allows for the transfer of one's shares to be done at fair market value, tax free. Generally, the owner of an operating company can exchange their common shares for preferred shares at fair market value and then issue new common shares to a person (such as a child) and then the child's common share value would be based on the growth in value of the company. At a high level, this is what is referred to as an estate freeze.

A simple example –

Suppose a single mother (Mrs. Smith) is the sole shareholder of her company that she started up from scratch over 20 years ago using her hard work and sweat (BusinessCo Inc.).  BusinessCo Inc. is now a highly successful service company and Mrs. Smith's shares are worth $1 million today, according to a recent business valuation she had. Based on the company's