Commentary |  June 2016  |  by Gary Crosby

An accumulation of tax changes in recent years means that owners (and their advisors) should stay current on the latest strategies – and consider their options. Below, we model the benefits of an insurance-based strategy that can reduce tax liabilities considerably.

As you know, a common estate planning technique for many successful family-owned businesses is to implement an estate freeze. The value of interests owned by G1 is fixed at a point in time, and any future growth accrues to G2. This is typically followed by a share redemption strategy that gradually depletes the value of the G1 freeze shares over time and can shift more value to G2. This can slowly reduce, and even eliminate, the tax resulting on the death of G1.

This ‘wasting freeze’ strategy – the freeze and subsequent redemptions – worked effectively
for a long time because it didn’t cost much, if anything, particularly where a capital dividend account (CDA) was available.

But times are changing.

  • Implementing a wasting freeze becomes more problematic when there is little or
    no CDA, where G1 doesn’t require income to fund their lifestyle requirements, or
    when no refundable tax accounts are being generated.
  • Even when there are refundable tax accounts within the company, it may not be
    a wise strategy to redeem shares in light of recent tax rate changes. The tax to be paid
    by G1 on the share redemption will now exceed the dividend refund received by the company. 

Tax changes mean it’s time to reconsider redemption strategies.

With evolving tax rates in recent years –culminating in the wholesale adjustments that
became effective at the start of 2016 – private companies and their advisors should weigh up their options, particularly with fewer cash-neutral or cash-positive ways to redeem shares.

Currently, in Ontario, a slight cost is incurred when shares are redeemed (resulting in an
eligible dividend to G1), and a dividend refund is received by the company. The cost is even greater if the redemption results in a non eligible dividend to G1, which will often be
the case for a family-owned company.

The insurance-based strategy is a viable option.

In certain circumstances, it may make sense to use a life insured redemption strategy rather
than a wasting freeze strategy – or, at the very least, consider a blend of the various strategies available.

The CDA created when life insurance proceeds are received by a company can be used to
reduce (or even eliminate) tax on death – a savings that isn’t available under a traditional
wasting freeze alone.

This model demonstrates the difference in net cost between a standard redemption strategy and an insured redemption strategy.


  • Insurance premium rates and life expectancy assumptions will impact any consideration of the life insured redemption strategy, so a full understanding of the relative costs, as well as other advantages and disadvantages, is important for good decision-making.
  • Using a detailed financial model to illustrate the cost impact of different redemption options – and determining the right mix for each client situation – is an invaluable tool in assessing the overall effectiveness of a client’s estate plan.

Many affluent business families believe
they don’t need insurance. After all, they
have plenty of assets. However, insurance
is an effective tool to significantly reduce
tax liabilities. Compared to other strategies, insurance often costs considerably less.


At a minimum: A combined ‘wasting freeze + insured redemption strategy’ is likely an optimal mix for most high net worth clients.

The ability to model costs accurately is the key to selecting the right mix.





Gary Crosby supports CMG and its clients with advanced tax and estate planning expertise.