Using a family trust for your business

Benefit from the tax advantages

Are you considering setting up a family trust? There are some key benefits to doing so, but it can also be a complicated matter. You will need proper legal and tax advice before deciding to use one.

While they may seem complicated, when a family trust is set up as a shareholder of your company, it can offer tax-saving opportunities. Before discussing your options with a lawyer or tax expert, here are three of the benefits you should know about.

1. The lifetime capital gains exemption

The first area where a family trust might help you save tax relates to capital gains. In general, if your company is a Qualified Small Business Corporation that passes certain tests, you may be eligible for a lifetime capital gains exemption when your shares are sold. In addition, each of your family members can also benefit from this exemption.

However, if your company’s common shares are owned by a family trust, the growth in their value is also held by the trust. If the trust’s shares are sold in the future, any gain in their value can therefore be distributed amongst the beneficiaries – often in the manner that the trustee of the trust decides at that time.

Maximizing the exemption across family members can minimize the amount of tax paid on the capital gain.

2. Income-splitting with your spouse and children

The second tax-saving opportunity comes from the option to income split with your spouse and children over the age of 17. As the owner of your company’s common shares, your family trust can receive dividends.

The dividends can then be distributed to the beneficiaries who will report them as income in the year they’re received. This is a great way to fund education plans or help children save for a down payment on a home or other large asset.

Family members in lower tax brackets will pay less tax on the dividends than those in higher brackets, and by spreading the dividends, tax can be reduced overall.

3. Delay taxation when a beneficiary dies

And third, a family trust can be used to delay taxation when a beneficiary dies. At death, an individual is deemed to have disposed of their assets at fair market value, and taxes can result.
When a family trust owns the shares of an operating company, the death of an individual beneficiary does not necessarily create a tax liability because they do not own the company’s shares. The individual only receives the benefits of being an indirect shareholder.

Seek advice before setting up a family trust

Before setting up a family trust, you should seek professional advice; it’s an involved process and every business situation is different. An advisory team that includes your lawyer, accountant and business banking advisor can ensure that a family trust be structured properly to work in your best interest.