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Here’s an example. John is widowed and has three adult children. He owns a Canadian company — Canco — that has a value of $10 million. John expects Canco’s value will increase to at least $100 million by the time of his death. He plans to leave the company to his children when he dies and he doesn’t want to burden them with capital gains tax of more than $25 million. So John consults his tax lawyer and they implement the “freeze.”

John surrenders all of his common shares of Canco in exchange for $10 million of new voting preferred shares. His children then subscribe for new Canco common shares, for which they pay a nominal amount. When the smoke has cleared and the ink is dry, John owns preferred shares of Canco that are frozen in value at an amount of $10 million, while his children own all of Canco’s common shares.

The common shares have no value today (Canco is worth $10 million and John has preferred shares of $10 million), but the shares will grow in value until the time of John’s death. In the meantime, John continues to control the company, and $10 million is enough to ensure he enjoys a comfortable lifestyle.

As the years pass, John redeems his $10 million in preferred shares and pays personal taxes as a result. When he passes away, Canco’s only remaining shares are the common shares the children acquired as part of the freeze. The company has been transferred to John’s children without any capital gains tax on death, and more than $20 million of tax has been avoided. Tax eventually will be due but only when the children dispose of the shares, perhaps on their own deaths 30 or 40 years after their father’s demise.