Business owners: Could a family trust help you save up to 32% off your taxes?

As a business lawyer, I meet with entrepreneurs on a daily basis, and for many of them, their most valuable asset is their corporation. For obvious reasons, their first priority is on income-earning activities, such as generating sales. Attention to such activities is, of course, a practical necessity and a hallmark of success. However, the utilization of a proper corporate structure to reduce tax exposure is often overlooked. Business owners are often unaware that the proper structure can save a substantial amount of taxes and be greatly beneficial for them and their family. The purpose of this brief article is to explain to you the benefits of using a Family Trust and to help you determine if you are a good candidate for implementing such a structure.

What is a Family Trust?

In essence, a trust is not a legal entity like a corporation, but rather a relationship that exists whenever a person, called a Trustee, holds property for the benefit of other individuals. The trust arrangement permits the legal ownership of the property to be held by the trustee while the benefits of ownership (income, capital gains) accrue to the beneficiaries. It is common practice for an entrepreneur and his or her spouse to act as Trustees of their Family Trust. Hence, entrepreneurs can still maintain control over their companies, while benefiting from a trust arrangement (subject to their fiduciary duties to act in the best interest of the beneficiaries).

How do I determine if I’m a good candidate to setup a Family Trust?

Here are some key indicators that you should consider a Family Trust:

Ø You are a shareholder in a private corporation.
Ø Your business is generating taxable profits.
Ø You have children(s) and you are paying/will pay for their education(s).
Ø You may want to sell your company in the future.
Ø You want to protect your family from higher estate taxes.

Would it be beneficial for me and for my family?

Some of the benefits of using a Family Trust structure are:

Income splitting.

A well-structured family trust allows for splitting the income earned by the trust among the various beneficiaries. If you are a high income earner you may be able to split your revenue to a lower income earner. (subject to the potential application of the attribution rules and the “kiddie tax”).

Funding of your children’s education.

One of the most immediate benefits is the funding of your children’s education. By having the trust own shares in the family company and having your children as beneficiaries of the trust, it is possible to fund as much as $32,000.00 per child over the age of 18 at a tax rate of approximately 16% through the trust as opposed to funding your child’s education from your personal funds which are usually taxed at a substantially higher rate. If you are a high income earner you will be paying tax at approximately 48%. Basically, with this structure, you can potentially save as much as 32% on your taxes (i.e. a potential saving of $32,000 for each $100,000 earned). This is a substantial savings for each of your children for each year that he/she is in school with little or no other source of income.

Capital gains exemption.

Once in your life time, you may be eligible to claim the $750,000 capital gains exemption. Basically, what it means it that an individual selling his/her shares of a Canadian Private Corporation (subject to a set of specific rules) can receive the first $750,000 on a tax free basis. Hence, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.
Reducing tax liability at death. Transferring assets to a trust may limit the size of the individual’s estate, such that tax liability at death is reduced. In addition, probate fees may be reduced.

As you can see, a Family Trust can offer private business owners a great deal of opportunities to benefit and should be further explored. Any individual who is interested in setting up a corporate structure that involves a Family Trust should evaluate all the tax consequences and consult with a knowledgeable professional. For more personalized information and assistance analyzing whether you would benefit from setting up a Family Trust contact me for an appointment.