Family Trust vs. Holding Corporations
We often discuss the use of a Family Trust instead of a Holding Corporation for our clients at ConductLaw.
We are often asked by clients when they create a new company whether they should hold the shares of the new corporation directly or whether they should do so indirectly by using a Holding Corporation or a Family Trust.
It is discussed again in the future if a business has been successful and the shares of the corporation have been held by the client and the client is now trying to decide whether it makes sense to incorporate a holding company or family trust into their corporate tax structure, or for creditor proofing and/or other estate planning purposes.
When a business owner decides to start a new business and incorporates, obviously there is some uncertainty as to whether the new business will be successful and the business owner will want to keep costs under control. It is no surprise then that many business owners decide to keep their corporate structure simple to keep their costs to a minimum.
However, if you have the budget upon incorporation, you may wish to consider having a family trust own the shares of the private corporation rather than directly owning the shares or using a holding company from the outset. Two main reasons you may wish to consider this corporate structure are: (1) you can have a holding company as a beneficiary of a family trust which can provide all the benefits of a direct holding company; and (2) a family trust provides you with a great deal of tax planning flexibility.
There are numerous benefits to having a family trust as a shareholder of an active business. For example, in the event of a sale of the business, a family trust can provide for the multiplication of the $800,000 lifetime capital gains exemption on a sale of qualifying small business corporation shares. In other words, it may be possible to allocate the capital gain upon the sale to you, your spouse, your children or any other beneficiaries of the trust, resulting in the multiplication of the exemption and creating a significant savings in income taxes owing in the event of a sale.
Lastly, if you have surplus earnings in a corporation and you wish to creditor proof those earnings, but do not want to allocate those funds to your spouse or your children, you may be able to allocate those funds tax-free to the holding company if it is a beneficiary of the trust. Among other things, this allows for income tax deferral of personal taxes until the holding company pays a dividend to the shareholders.
Feel free to speak with one of the advisors at ConductLaw to determine the best way to structure your business. We have offices in Ottawa, Barrhaven, and Kanata and would be pleased to speak with you if you have any questions or would like to discuss the benefits of using a Family Trust further.