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The family entrepreneur's best friend


Simon Houle

Update :
Update :
September 11, 2017

The family entrepreneur's best friend.

Quebec has the highest income tax rate in the country. This is true for the individual, but also for the business. For this reason, entrepreneurs and incorporated professionals are well advised to use strategies to reduce the tax burden through the family trust while protecting their assets from creditors.

What is a family trust?

The family trust is a legal entity constituted under the Civil Code of Québec. Like the corporation, the trust has an autonomous and distinct patrimony. Normally, the purpose of a family trust is to hold and administer property for the benefit of certain family members; the beneficiaries.

The three players needed to set up a family trust are the settlor, the trustee(s) and the beneficiary(ies). The settlor is the one who creates the trust while the trustees manage the assets and decide on the distribution of income or capital to the beneficiaries, according to the terms of the trust deed.

Income splitting

It is often very advantageous to hold the common shares of a small business in a family trust for several reasons. The first is that it will be possible to pay a dividend to dependents (adult children, spouse, etc.) who will pay less or no tax on the dividends received. This is a good example of income splitting. The trust makes it possible for the entrepreneur's household to save on taxes, which can be substantial from year to year.

My RESP is maximized

Speaking of income splitting... The financially well-off have more options for funding children's education. In addition to contributing as much as possible to a Registered Education Savings Plan (RESP), they may want to set up a trust.

A trust allows for income splitting between the parent and child and will allow the child to continue to save tax-efficiently for education beyond the lifetime RESP contribution limit of $50,000 per beneficiary.

It is simply a matter of giving capital to a trust of which the client's children are beneficiaries. This capital will generate investment income each year that will be allocated to the children and taxed in their hands at a much lower tax rate. However, for this strategy to be attractive, the capital given to the trust must be large enough to justify the cost of maintaining a trust.

Capital gains exemption

The primary tax benefit to the entrepreneur is the capital gains tax exemption ($835,716 in 2017). This exemption applies on the sale of qualified small business shares. Here, the family trust plays more than one important role.

  • It facilitates the qualification of actions to have access to the tax exemption;
  • It allows the tax exemption to be shared with the various beneficiaries (minors or adults) of the trust to whom the trustees grant a portion of the capital gain.

Use in connection with a corporate share freeze

The family trust is also used to freeze the shares of a corporation in order to limit the tax liability at death and to transfer the appreciation of the company to the next generation while keeping the control of the company for a certain number of years.

Asset protection

Because the trust has its own separate estate, a creditor obtaining a judgment against you or your business will not be able to enforce it against the trust's assets. This will allow you to protect your assets, even in the most difficult of times.