There are potential income tax benefits of having a family trust
as a part of your corporate structure, as it could mean tens
— if not hundreds — of thousands of extra dollars in
your pocket... legally. Generally, family trusts are useful to have
when there is a desire to income split and save on taxes, or in
preparation of the sale of your business since you can multiply
your eligible capital gains exemption.
If you are interested in having a family trust in your corporate
structure, you will need to consult with a specialist in tax
planning to reorganize your corporation's share structure.
Don't worry, while this may sound daunting, it's something
we do regularly here at Fuller Landau and we are happy to do the
"heavy lifting" for you.
What is a Family Trust?
A family trust is a legal relationship between trustees, who
control the family trust's assets, and the beneficiaries who
benefit from the family trust's assets. Trustees are most
commonly Dad, Mom, (or the specific form of your family's
parental make-up; for this article we will use Mom and Dad) and
another family member or trusted business advisor. Examples of
typical beneficiaries are Dad, Mom, children, grandchildren,
grandparents, other people as desired, and corporations wholly
owned by one or more beneficiaries. Effectively, Mom and Dad could
be both trustees (the decision-makers of the trust) and
beneficiaries (reaping the benefits of the trust).
A settlor, who is usually a family member or close friend who
will not be a trustee or beneficiary, sets up the family trust. The
settlor establishes a family trust with a gift (e.g. $5
bill). Once the trust has been set up, the settlor generally
does not have any further involvement with the trust.
Tax Benefits of a Family Trust
A family trust is considered a taxpayer for Canadian income tax
purposes and pays income tax at the top marginal tax rates.
However, any income or capital gains earned by the family trust can
be allocated to a beneficiary who would pay income tax on the
allocated income at their respective marginal tax rates rather than
the top tax rate that the family trust would pay. The
trustees would determine which beneficiaries receive the income
allocations from the trust each year. It is important to note
that any allocation/money that is received by a beneficiary is
The main tax benefits of a family trust are:
Accessing other family members' Capital Gains Exemptions
("CGE"): every individual gets one CGE during their
lifetime. Currently, a CGE can shelter up to $813,000 (2015
amount) of capital gains relating to the sale of qualified small
business corporation shares. Each CGE shelters approximately
$200,000 of income tax. This is particularly beneficial when a
corporation is anticipating significant growth in the future. If a
family trust became a shareholder of the corporation, the growth in
the value of the corporation would accrue in the value of the
shares owned by the trust. If the shares were sold in the future,
the capital gain relating to the shares owned by the trust could be
allocated to the beneficiaries. Each beneficiary could then
potentially use their CGE to shelter up to $813,000 of the capital
gains from capital gains tax.
Income splitting with spouse, adult children and other adult
beneficiaries: dividends can be paid out to the family trust and
allocated to beneficiaries in lower income tax brackets.
Beneficiaries with no other income could receive approximately
$40,000 of dividends in a year and pay little to no income tax. As
compared to a taxpayer earning over $140,000 of income, they pay
approximately $14,500 in tax on the $40,000 dividend.
Having a corporate beneficiary allows dividends that are not
required for personal use to flow to the corporate beneficiary on a
tax-deferred basis. This is beneficial for corporations that
generate excess cash that is not required for business purposes and
that is not currently required for personal use.
Steps Required for a Family Trust to become a Shareholder of
If you decide to you want to set up a family trust, what happens
next? Let's say you own Company X.
Your common shares of Company X would be exchanged for special
shares of Company X that have a fair market value ("FMV")
equal to the current FMV of the common shares. The special shares
would reflect the current value of the company and would not
participate in the future growth of the company. A formal
valuation of the corporation would be required to determine the FMV
of the common shares.
A family trust would be established. The trust subscribes for
new common shares from the treasury of Company X for a nominal
amount (e.g. a $5 bill). Any future growth in the value of
Company X would accrue in the value of the common shares owned by
the family trust.
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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