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Recent changes to the Income Tax Act have caused many people to
conclude that family trusts are no longer useful planning vehicles.
Don't be quick to jump to this conclusion. There are still many
reasons to use family trusts.
In the past, the existence of a family trust as a shareholder of
a corporation meant that dividends could be paid to the family
trust and taxed in the hands of minor children. If the child had no
other income, the child could receive up to $24,000 per annum
without tax. Unfortunately for years after 1999, there will no
longer be any benefit to having dividends from private corporations
tax in the hands of minor children. With the introduction of the
income splitting tax or "Kiddie Tax" as it has come to be
called, these dividends will be taxed at the top marginal rate
except in certain specific situations.
The loss of the tax advantage with respect to dividends does not
mean that there are no benefits to family trusts. Consider the
following advantages which still exist:
Estate Freeze - having a family trust as a
shareholder after freezing an owner-manager's common shares
will reduce taxes payable on the deemed disposition which occurs on
the death of the owner-manager.
Sale of a Business - where a private business
is sold or goes public, it may be possible to multiply the capital
gains exemption of up $500,000 of capital gain on shares of a
qualified small business by the use of a family trust. Capital
gains realized by a family trust can be allocated to the
beneficiaries.
Dividends to Adult Children - a family trust
can still be used for dividends where the children are over 18
which could be of use where there are children attending
university.
Confidentiality - aside from the requirement
of filing an annual trust return with Canada Customs and Revenue
Agency, there are no requirements to disclose the creation or
operations of a family trust unlike that of a corporation where
shareholders and shareholdings are a matter of public record.
Creditor Proofing - property which is
beneficially owned by a family trust does not form part of the
estate of the creator of the trust. No creditor claiming against
the person who created the trust or any discretionary beneficiaries
can have a direct claim against the trust property. In certain
situations a family trust can be used as an effective method of
providing support for children where there is a matrimonial
breakdown.
Separation of Beneficial and Legal Ownership -
a trust allows one group of persons to control the property in the
trust and the other group of persons to own the property and
receive any benefits that accrue to the property. This is
particularly useful where parents wish to retain control of a small
business or other asset yet pass any growth on to their
children.
Lack of Structure - a trust is a very flexible
vehicle because the trustees can be given unlimited discretion with
respect to the payment of income and capital out of the trust.
There is very little legislation which affects family trusts.
Avoidance of Problems with Wills - where
property has been transferred to a trust, it will not form part of
the estate of the person who created the trust. This avoids the
public disclosure which is part of the probate procedure. In
addition, possible challenges to the will based on lack of capacity
or undue influence may be minimized. The cost and delay of estate
administration including probate fees will be avoided.
Insurance - more complex planning
opportunities exist with respect to the use of insurance and family
trusts. This can result in an avoidance of the 21 year deemed
disposition rule. If the insurance policy is an exempt policy,
there can be a deferral and the potential for complete avoidance of
attribution on the accumulating income. The attribution rules are
designed to prevent the spreading or splitting of income among
related parties to reduce the overall taxation on the income.
In summary, there are many reasons to continue to consider the
use of a family trust. Any of the above circumstances may produce
benefits in your particular situation. Setting up a family trust
however, should not be undertaken without consulting your
professional advisors with respect to both tax and non-tax
implications.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Today (May 2, 2013), Ontario Finance Minister, Charles Sousa tabled the province’s 2013 Budget. This year’s budget, titled "A Prosperous and Fair Ontario" is committed to eliminating the deficit by 2017-18 and then reducing the net debt-to-GDP ratio to the pre-recession level of 27%.
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Tax Communiqué: Highlights From The Budget 2013 (Video Content)
