A family trust is becoming an increasingly popular way
to safeguard assets and split income.
As Saskatoon tax lawyer Beaty Beaubier puts it, "a family trust is
for those individuals who want to share wealth but not necessarily
A family trust is not a legal entity like a corporation.
However, for income tax purposes, the trust is considered to be an
"individual" and must file an annual trust return (Form T3) to the
Canada Revenue Agency within 90 days of the trust's fiscal year-end.
Typically, one or both of the parents act as trustees,
who have fiduciary duties to the beneficiaries. In their simplest
form, these fiduciary duties can be described as duties of loyalty, care
Setting up a family trust to hold
common shares of a farming corporation has advantages:
An ability to split income among children
because business income can be distributed as dividends to
lower-bracket adult family members.
A family trust can be "discretionary," which
allows the trustee to decide in what proportion or amount income or
property will be distributed to beneficiaries. For example, if
one child is running the farm business and financing the retirement
of the parents, the parents may choose to allocate a higher
proportion or all of the shares held by the trust to that child.
Discretionary trusts may in certain
circumstances provide a means of safe-guarding assets from
matrimonial division or seizure by creditors because the allocation
of income and property is up to the discretion of the trustee.
A family trust provides a means of "spinning
out" non-business assets to a corporate beneficiary of the trust.
To qualify for the capital gains exemption, at least 90 percent of
the company's assets must be devoted to qualifying Canadian business
activities. Also, the majority of the company's assets must be
devoted to such activities throughout the two years before a
disposition. Non-business assets, such as portfolio
investments and rental properties, will put taxpayers "off-side" of
small business corporation status.
A family trust is essentially a private
arrangement, the details of which are not generally subject to
However, a family trust also has disadvantages:
For certain income tax purposes, all
beneficiaries are deemed to control all of the shares of a
corporation that is owned by a discretionary trust. This means
that if one of the beneficiaries controls another small business
corporation, that corporation will be "associated" and forced to
share the $400,000 small business limit with a farming corporation
that is controlled by a discretionary trust.
The corporate tax rate is lower for businesses with profits of
$400,000 or less. Corporations with larger profits face higher
By creating an "inter vivos trust," which means
it is created in your lifetime, taxpayers lose the advantage of
creating a "testamentary trust" upon their death. Income
generated in a testamentary trust is taxed at progressive tax rates
while income taxed in an inter vivos trust is taxed at the highest
It should be noted that a trust is deemed to have
disposed of its holdings after 21 years. This 21-year rule
triggers a capital gain on a deemed disposition of the farm corporation
Because these shares would normally qualify for the
capital gains exemption, no tax should be triggered provided that the
capital gain can be allocated and distributed to Canadian residents who
are eligible to claim the capital gains exemption.
The biggest problem with succession planning and
the potential use of a family trust is leaving it until it is too late.
Seek professional help and get started, even if succession is many years
down the road.
Allyn Tastad, certified general accountant, is a
partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at
306-653-5100, e-mail at
email@example.com or website
www.hth-accountants.ca. He is
also involved in the family farm near Loreburn, Saskatchewan. The
opinions expressed in this column are for information only.