Three benefits of using a family trust for your business
Family trusts can be complicated, and you need to get proper legal and tax advice before deciding to use one.
While they may be complicated, in a common form where the family trust is established as a shareholder of your company, they can offer some potential tax-saving opportunities.
Let’s explore three of these in more detail.
1. Take advantage of the lifetime capital gains exemption
The first area 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. Potential income-splitting with your spouse and children
The second tax-saving opportunity comes from potential income-splitting with your spouse and children generally over the age of 17. As the owner of your company’s common shares, your family trust can be paid 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 pay for university or help children save for a down payment.
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 finally, 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 because this is an involved process where every situation is different. The benefits outlined here have also been simplified, and there may also be many non-tax benefits as well.
The combined expertise of your lawyer, accountant and business advisor can ensure that a family trust is in your best interest and that it is created properly.