Freezing share value simply means the older generation retains ownership in the corporation as preferred shareholders, but “freezes” the value of their interest in the corporation at a fixed amount. The children then come in as new common shareholders, entitling them to any future increase in the value of the corporation’s assets.
One benefit of implementing a freeze is that it fixes the retirees’ income-tax liability associated with the value they hold. This is also a way to avoid overflowing beyond the capital-gains tax exemption. One benefit of using frozen preferred shares is that it fixes Dad’s income tax liability associated with the value they hold.
Read Also
Riding the tariff rollercoaster
Farmers are accustomed to roller-coaster years. But the current geopolitical windstorm is something else entirely. On his cattle operation near…
Preferred shares also allow parents to pass on part of the farm corporation to non-farming offspring because they can be classified as non-voting. It also allows for owners to sell their shares at a set value. So the common shares can be for the active risk-taking owners, which engages them to increase the value of the shares.
By buying into the farm corporation incrementally, it allows the next generation to invest sweat equity and management. However, if retiring parties give up all their voting rights for the company and they do not agree with a new direction that the new shareholders are taking, they have no ability to override their decision. Alternatively, voting rights can be attached to their preferred shares
Also, a huge chunk of capital doesn’t leave the corporation short for expansion projects and cash flow. The capital is not withdrawn at once so their debt servicing capacity is secure to expand the farm.
In corporations, individual shareholders can sell and get out the business. The corporation is the entity, not the individual owner. This is especially important when the next generation is young, not tied to marriage and children and have many different opportunities.
“Normally the company will also have a buy/sell agreement,” says Morin. So if something specific happens to the shareholder, such as death or divorce, the company must redeem the shares.
“Life insurance can be purchased by the company to ensure the company has sufficient cash on hand so that it can redeem those preferred shares,” says Morin. “Alternatively, the retiring party may also state in his will that all his preferred shares go to one or more of the next generation shareholders upon his death.”
