CRA considers that multiple implementation by arm’s length shareholders of estate freezes generally will preclude subsequently accessing the capital gains exemption

Although s. 110.6(8) completely denies the capital gains deduction if any "significant part" of the individual’s capital gain is attributable to dividends not being paid on shares, Reg. 6205(2) provides an exception for qualifying estate freezes of a corporation (Opco), so that the Parent can take back freeze preferred shares under s. 86 with a non-cumulative dividend which might not be declared, thereby increasing the appreciation in the common shares for which a trust for the Parent’s children had subscribed.  However, there is a requirement in Reg. 6205(2) that there not be any beneficiary of the trust who deals at arm’s length with the holder of the preferred shares.

CRA interprets this requirement as effectively indicating that it is not possible for multiple (say, four) individual shareholders of Opco, who deal with each other at arm’s length, to each implement an estate freeze under s. 86, given that beneficiaries of each children’s trust will deal at arm’s length with the other three "freezor" shareholders.  However, CRA is somewhat amenable to the notion that it might satisfy Reg. 6205(2) if the four shareholders first transferred their shares of Opco into respective Newcos, and then carried out a s. 86 estate freeze at the Newco level (so that the non-arm’s length test worked at that level) – with the four Newcos then amalgamating with Opco.

Neal Armstrong.  Summary of 11 October 2013 APFF Roundtable Q. 5, 2013-0496511C6 F under Reg. 6205(2).