CRA accepts that s. 74.4(2) imputed interest can be avoided following an estate freeze by using a stock dividend of preferred shares

CRA considers that where an individual holding all the common shares of Opco (which is not a small business corporation) accomplishes an estate freeze through exchanging his common shares of Opco for preferred shares, with a trust for his minor children then subscribing a nominal amount for common shares, s. 74.4(2) will apply to impute interest to him on his preferred shares.

On the other hand, if he has Opco pay a stock dividend to him of preferred shares (thereby shifting most of the value from the common shares to the preferreds, which have nominal paid-up capital so there is only a nominal income inclusion to him), with the trust then subscribing for common shares, CRA accepts (consistently with 2003-0004125 F) that s. 74.4(2) will not apply. The safe income on hand previously attributable to his common shares will be apportioned between his preferred shares and his remaining common shares based on a comparison of the accrued gain on the common shares before the stock dividend with the accrued gain on the preferred shares after the stock dividend.

Neal Armstrong. Summaries of 10 October 2014 APFF Roundtable, Q. 19, 2014-0538041C6 F under s. 74.4(2), s. 55(2), s. 15(1.1) and Reg. 6205(2)(a).