Family Trust as a Shareholder

December 2, 2014

There are numerous benefits to employing a Family Trust as a shareholder of your corporation.

A Family Trust may hold shares of a private corporation and in so doing freeze or crystallize income tax liability, provide creditor proofing, income split with family members, and multiply access to the $800,000 lifetime capital gains exemption.

To realize such benefits, a shareholder would typically freeze the value of their common shares in the private corporation. At the date of the freeze, the shareholder would exchange their common shares for special preferred shares with a value equal to the value of the common shares exchanged. If created properly the special preferred shares would no longer increase in value thereby accomplishing the desired freeze.

With this plan, any future growth in the value of the corporation will accrue to the new common shares that are issued as part of the reorganization. Of course, that future growth will accrue directly to a Family Trust if it is the owner of the new common shares.

By crystallizing the income tax liability in this way, the shareholder will know the maximum income tax liability on their special shares and may plan to pay down this liability with surplus funds or life insurance.

With this knowledge, the shareholder could further reduce their income tax liability by redeeming their freeze shares over time. If planned properly, a shareholder can eliminate much if not all of their income tax liability prior to their death by redeeming shares regularly.

If a Family Trust subscribes for the new common shares, the inclusion of certain beneficiaries can provide tax-effective income splitting on dividends. This is particularly effective when the children are 18 years of age or older or when there is a spouse in a lower income tax bracket. If this is the case, and there is no other taxable income, it is possible for a beneficiary to receive $36,000 in tax-free dividends.

The Family Trust can also provide tax-effective income splitting on the sale of a business no matter what the beneficiary’s age.

Lastly, with respect to creditor proofing, a Holdco could be included as a beneficiary of the Family Trust. This would provide a means to transfer any excess funds as a tax-free dividend to the Holdco and in so doing shelter any excess cash from potential creditors.

If you wish to explore the use of a Family Trust as a shareholder feel free to consult with one of the professionals at ConductLaw. It is not an overly cumbersome process and the benefits as described above may be substantial.