Please note that there are significant tax changes being introduced by the government which might make much of what is set out below inaccurate. This page will be revised in due course based on the legislation being introduced.
Are there other ways of restructuring a family business?
Yes, many families make use of a family trust. Often the trust (often by way of an 86 freeze) acquires the common shares of the family business. Hence all the growth and income flows through to the beneficiaries which could be parents, children, grandchildren and often a separate company owned by one or more beneficiaries. There are a number of rules to determine who may receive income and capital from the thrust but when properly set up both the income from the company and the capital (sale of shares) may be divided amongst a number of family members,.
What are some of the advantages of a family trust?
The are a number of tax and estate planning benefits of a family trust. One of the most useful is the ability of the Trustee(s) to determine how much income each beneficiary is to receive from time to time. This is extremely useful in educating your children through a trust when the needs of each child could change year to year. It also allows the distribution of capital to be determined at a later time. For example the company business is owned by the trust and only one of three children is involved in the business. This has only been determined years after the trust was established. The trustee(s) could allocate all of the company shares to that one child involved in the business.
Are there any tax advantages in using a family trust?
Each family and family business is different and the income tax act is constantly changes but at present, if structured properly, each beneficiary is entitled to receive a dividend as the declared by the company in favor of the trust and then distributed to the beneficiaries. In 2017, in Ontario, a beneficiary receiving a dividend, could received $35,000 or more in dividends with out paying any tax if he or she has no other income for the year. Hence the child’s education is paid by way of $0.15 dollars (corporate tax rate up to $500,000.) as opposed to your individual tax rate.
Are there disadvantages in using a family trust?
Family trusts are not for everyone and the cost might not be merited. Further, there is a deemed disposition every twenty-one years which could create a large tax liability. Minor children are not entitled to receive income from the trust and will pay a very high rate of tax. Beneficiaries who either are residence or citizens of other countries (especially the United States) could have significant reporting a tax issues in that jurisdiction. There are further complications depending on how the family business is operated and whether the trust owns a holding company with passive assets. Before a family trust is established a tax accountant should be contacted to discuss these problems.