Corporate Attribution in the Context of an Estate Freeze: Watch Out for the Trap

By Aliya Goldan, CPA, CA; published in CPABC in Focus
Published: May 2021

erhui1979/DigitalVision Vectors/Getty Images

An estate freeze is a commonly used tax-planning strategy. Taxpayers may use an estate freeze to transition a business to the next generation, to multiply the lifetime capital gains exemption on a future sale of shares, or—most commonly—to reduce an individual’s eventual tax burden resulting from the deemed disposition of private company shares on death.

However, one matter that is often overlooked when implementing an estate freeze is the application of the corporate attribution rule, which can result in double taxation.

The standard estate freeze

In a standard estate freeze, the sole individual shareholder (“freezor”) of a company exchanges, on a tax-deferred basis, their common shares for fixed-value preferred shares, effectively freezing the company’s full current value into these preferred shares. A discretionary family trust then subscribes for new common shares of the company at a nominal amount. The beneficiaries of the family trust typically include the freezor, their spouse, and their children (including minors).

The trap

The corporate attribution rule is designed to prevent taxpayers from splitting income with spouses and related minors. It generally applies when:

  • An individual transfers or loans property1 to a corporation2 and
  • One of the main purposes of this transfer may reasonably be considered to be to reduce the individual’s income and to benefit3 a “designated person, in respect of the individual.”4 In this context, a designated person in respect of an individual includes the individual’s spouse and any related minors (including nieces and nephews).

In the estate freeze example given above, the freezor has fixed their direct interest in the company through a tax-deferred exchange of shares. While an exchange of shares may not seem equivalent to a transfer of property to a corporation, it is considered a transfer of property to a corporation under the corporate attribution rule.

In fact, the Canada Revenue Agency (CRA) has stated that the purpose test would generally be met in a standard estate freeze where designated persons are beneficiaries of a trust, regardless of whether any income is distributed to them.

The impact

The result of the application of the corporate attribution rule is a deemed interest inclusion to the individual shareholder who transferred the property (the transferor). The deemed interest inclusion is calculated as the prescribed rate of interest for the period (currently 1%) multiplied by the outstanding amount of shares or debt issued by the company as consideration for the transferred property. This deemed interest income is reduced by any interest or taxable dividends received by the transferor and by any taxable dividends that are considered to be split income (TOSI) of the designated person.

Going back to the earlier example—absent any planning, for each period in which the corporate attribution rule applies, the freezor would be required to include in their income a deemed interest inclusion related to the value of the preferred shares that are issued and outstanding. This is punitive and effectively results in double taxation, as the company is not provided an offsetting deduction and the freezor is taxed on deemed income not actually earned.

Planning considerations

The safe harbour exception

This exception to the corporate attribution rule applies only when an estate freeze is implemented with the use of a trust and:

  • The designated person’s only interest in the company is through their beneficial interest in the trust;
  • The terms of the trust stipulate that the designated person may not receive or otherwise obtain the use of any of the trust’s income or capital while being a designated person in respect of the transferor;
  • The designated person has not benefited from the trust’s income or capital; and
  • No income has been allocated to the designated person by the trust.

While the safe harbour exception may seem like a simple “fix” to the application of the corporate attribution rule, the intent of the trust must be considered carefully first. If the intent of the trust is to multiply the lifetime capital gains exemption among beneficiaries who are designated persons, it would be inconsistent to have the terms of the trust restrict the ability of a beneficiary to access the trust’s income or capital.

erhui1979/DigitalVision Vectors/Getty Images

Payment of dividends or interest

The deemed interest inclusion under the corporate attribution rule is reduced by any interest or taxable (grossed-up) dividends received by the transferor. Therefore, when the company pays taxable dividends on the shares issued as consideration for the transferred property or interest on the transferred property or loan, the individual will be subject to tax on income that is actually received, rather than on phantom income.

To effectively use this method to avoid the application of the corporate attribution rule, the terms of the preferred shares issued in an estate freeze should provide for a reasonable rate of dividend participation. The company should also ensure that the amount of taxable dividends or interest paid annually is at least equal to the prescribed rate.

It is important to note that only actual dividends paid will reduce the impact of the corporate attribution rule and that deemed dividends on the redemption of shares will not. In addition, if the value of the company is significant, the payment of annual dividends at the prescribed rate may result in higher than desired income in the hands of the freezor each year.

The stock dividend freeze

Rather than exchanging shares, a company can issue a stock dividend to achieve an estate freeze. Using this method, the company issues fixed-value preferred shares as a stock dividend to the individual shareholder on its common shares. The redemption amount of the preferred shares should be equal to the lowest conservative value of the common shares, and it should have nominal paid-up capital to avoid a taxable dividend to the freezor. As shares issued as a stock dividend cannot have a price-adjustment clause, setting the stock dividend at the lowest conservative value avoids freezing the share value too high.

The freezor then exchanges, on a tax-deferred basis, their remaining reduced-value common shares for a separate class of preferred shares, with a price-adjustment clause included to protect against potential valuation issues. A family trust may then subscribe for common shares of the company for a nominal amount.

The CRA has commented that the corporate attribution rule should not apply to shares issued as a stock dividend, because a stock dividend should not constitute a transfer. The rule may still apply to the exchange of the remaining common shares, but the resulting deemed income inclusion, or the required dividend payment to avoid the corporate attribution rule, would be significantly reduced.

Planning carefully

The corporate attribution rule is complex, and its inadvertent application could have significant punitive consequences for clients. Therefore, when planning for an estate freeze, public practitioners should carefully consider the rule, along with their client’s intentions, to ensure that the client’s objectives are met in a tax-efficient manner.


Aliya GoldanAliya Goldan is a senior manager with Smythe LLP in Vancouver. She specializes in personal and corporate tax planning for owner-managed businesses and corporate reorganizations. Photo by Kent Kallberg Studios.



  1. Either directly or indirectly (through a trust).
  2. The corporate attribution rule does not apply where the corporation is a small business corporation (SBC) throughout the year. An SBC is generally a Canadian-controlled private corporation, of which 90% or more of the assets’ fair market value is used principally to carry on an active business in Canada.
  3. Either directly or indirectly (through a trust).
  4. Income Tax Act, RSC 1985, c 1 (5th Supp.), subsection 74.5(5). Direct link for online version only:

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