Gifts of Private Company Preferred Shares to Registered Charities

“70% of private and family business owners are planning to sell or pass on their business over the next few years.  Of those family business owners, almost half are planning to pass on management and/or ownership to the next generation.”[1] 

This wealth transfer presents a once in a lifetime opportunity, but it also comes with unique challenges.  One of the challenges in the succession of a family business is the income tax liability that will arise on the transfer of the business from the parent to their children.  An estate freeze is a common tax and estate planning strategy that facilitates the transfer of wealth from one generation to the next in a tax-efficient manner.

An estate freeze works by fixing the value of the parent business owner’s interest in his or her business at a particular date, with the future growth accumulating to the benefit of his or her children.  More particularly, the parent business owner typically exchanges all of his or her common shares of the company for fixed-value preferred shares of the company (also known as “frozen or freeze shares”) with a redemption value equal to the value of the common shares, and the business owner often subscribes for another class of preferred shares which have voting rights attached to them in order to maintain control of the company.  Often, a newly created trust subscribes for new common shares of the company at a nominal value, which will benefit from the growth in value of the company in the future.  As a result, the preferred shareholder, being the parent, will have a fixed equity interest in the company, while the common shareholders, being a trust for the benefit of the children, will participate in the residual value of the company.

A philanthropic parent may wish to donate his or her preferred shares to a registered charity.  This may be done during his or her lifetime or on his or her death.  A benefit of making the donation during lifetime is that, not only does the charity receive the gift earlier than having to wait until the parent passes away, but this also removes the shares from forming part of the parent’s estate on his or her death.