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Family Trust vs Corporate Restructuring

August 17, 2012

Tax Question:

When would it be beneficial to set up a Family Trust instead of changing the share structure of my corporation?

Facts:

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.

Discussion:

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 setup 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 are 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 more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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