When would it be beneficial to set up a Family Trust instead of changing the share structure of my corporation?
If you are interested in the concept of dividend sprinkling to distribute income amongst family members as a tax savings measure, you can either restructure your corporation so that family members own different classes of shares in the corporation or you can set up a Family Trust.
To file a Section 85 or Section 86 and value your corporation to restructure it so that your family members each own different classes of shares for dividend sprinkling, requires a one time legal and accounting fee. However, setting up a Trust is a complicated process involving a lawyer, a settlor, a trustee and the beneficiaries. There is a one time set up fee for this also.
A Family Trust has a life cycle of twenty one years. After this, the trust must sell the shares in the operating company and distribute its assets every twenty one years. This requires quite a bit of paperwork and planning. A Family Trust must keep financial records and file a T3 every year. This means there is additional bookkeeping, paperwork and accounting fees incurred annually.
One of the benefits of a Family Trust is that the assets of the operating company are protected. Also, there is typically more flexibility with a trust as to determining who gets dividends each year. If you are an organized corporate owner who wants the added asset protection and security of a Family Trust and doesn’t mind some additional paperwork and bookkeeping, a Family Trust may be beneficial for you.
If you would like to discuss the cost and benefits of a Family Trust further, please contact us.Download a copy of this issue