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Wilfrid Laurier University Leaf
December 8, 2016
Canadian Excellence

Robert Mathieu


email: Robert Mathieu
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Robert Mathieu

The Use of Estate Freezes by Family-Owned Businesses (ABSTRACT)

Feltham, G., Feltham, T., & Mathieu, R.

published: 2003 | Research publication | Refereed Journals - Accounting

Feltham, G., Feltham, T., & Mathieu, R. (2003). "The Use of Estate Freezes by Family-Owned Businesses". Canadian Tax Journal, 51 (4), 1520-1541.

ABSTRACT:  It has been argued that the greatest risk to the continued success of a family-owned business is succession--the passing of the business from one generation to the next. Estate freezes can facilitate succession by fixing the value of the parent's interest in the business at a particular date, with future growth accumulating to the benefit of the children. This article documents the frequency of estate freezes among family businesses in Canada and explores the reasons for the level of use. Two investigative instruments are used: a survey of family business owners and a survey of tax professionals. Relatively few of the family businesses surveyed (15.8 percent of businesses whose owners have children) have performed a freeze. The net deferral benefit--the deferral value of an estate freeze less the present value of professional fees--for each family business is determined. There is a financial incentive for almost all of the sampled firms to have performed an estate freeze: on reasonable assumptions, over 90 percent of firms would have had a positive net deferral advantage. For an estate freeze to have deferral value, the parent must intend to pass the business on to his or her children. Surprisingly, this does not hold for a majority of family businesses in Canada. Parents are either uncertain whether they will pass the business on to their children or have decided against doing so. Alternatively, family businesses may be performing estate freezes, but at a later time than that which would maximize the net deferral value. Together, these two factors appear to explain why relatively few businesses have frozen, even when there is an apparent financial incentive to do so.

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revised Jan 19/05

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