Halloween is approaching and tales of things that rise from the dead fill the screen. Which brings us to the topic of todays post Family Trusts.
Ever since the changes to the taxation of private corporations in 2017 we have heard a lot of accountants say that family trusts are “dead”. While it is true that the changes in 2017 took away an income splitting opportunity for owner/managers, which is dearly missed. We want to draw your attention to some reasons why family trusts are still shambling among us.
To understand lets start with what happens when you die: the so called “death tax”. When you die, the CRA pretends you sold everything you own and your estate bought it back the same day for fair market value. In this case, fair market value means the price a willing buyer and seller would reach for a particular item. For the owner/manger this means everything they have:
Their principal home
Their investment accounts
All are going to be subject to a final capital gains tax. For my clients, I like to call this the “death tax”. It is what Canada instead of the estate tax. The problem for owner/managers is their businesses may have value, but may not have cash. As this death tax is payable upon death whether the business has the cash, the owner/manager needs to plan for what will happen.
There are some other strategies which we will discuss in future posts, but the one strategy I want to talk about is how a family trust can help. The family trust can ensure that we limit the exposure of the death tax of the owner/manager.
Enter the family trust. By having the common shares of the business held in the family trust rather than the owner/manager, we can limit the exposure of the death tax to only the value of the shares that are held by the owner/manager. The owner/manager can still control the business as being the trustee of the family trust throughout its lifetime. Also, after the death of the owner/manager, those shares can be rolled out of the trust for the benefit of the beneficiaries who would be the owner/manager’s spouse, children or other persons. This creates opportunities for income splitting and for avoiding the death tax.
In a future post we will discuss some ideas for how to set up the owner/manager’s family trust.