IS THE FAMILY TRUST DEAD?
Prior to July 18, 2017, one would often hear tax advisors recommending the implementation of a discretionary family trust to a family owned corporate group structure. As a result of the 2017 tax proposals, the full implementation of the Tax-On-Split-Income (“TOSI”) rules, effective as of January 1, 2018, has curtailed the common use of the family trust. It would be justifiable to state that with the advent of TOSI, the sole use of a trust to split income through the distribution of dividends, to family members who are not involved in the family business, is dead. However, there are other reasons to maintain a discretionary family trust.
A common misconception is that all income distributions from a family trust will now fall under the punitive measures of TOSI. While this is true for passive family members, an individual who is actively involved within the business would not have their distributions subject to TOSI as they be actively engaged on a regular, continuous, and substantial basis in the business. By doing so, they would meet an exception to the TOSI rules and would therefore be allowed to receive dividends from the family trust. If a trust was solely created for the use of income splitting then advisors may want to consider, depending on each individual situation, whether winding-up a trust makes more sense in the current environment or perhaps waiting a year or two to see if legislation at the Federal level changes.
The ability to claim the Lifetime Capital Gains Exemption (“LCGE”) through a family trust via eligible beneficiaries on qualifying shares of a business is still available through the October 2017 announcements and subsequent Federal 2018 Budget. If structured correctly, the ability to multiply the LCGE to eligible family members is a powerful tool on the sale of a family business as a good portion of the capital gains can be sheltered and flown through in a tax efficient manner.
Using a family trust to structure in children of business owners as beneficiaries is also attractive when looking at succession planning, as the parent who is also a business owner can still retain control of the company and delegate all dividends to themselves as to avoid TOSI. The children can still be beneficiaries and when they become actively involved within the company can begin to take dividends as well. Eventually, a tax deferred rollout of the shares under Subsection 107(2) of the Income Tax Act will allow for the transition of the shares to the children who would become the next generation of business owners.
The ability to use a trust for children also allows the parent business owners to ensure that direct shares in a business are not issued to their kids, where in the event of a divorce or break-up from their spouse or partner the shares are subject to a property claim. While family law is not settled on this issue, it should be noted that a family trust still provides a greater measure of protection against such claims. The trust also allows flexibility when the children are still dealing with uncertainty as to direction in their business or personal lives. The parent business owner ensures an appropriately worded trust indenture is in place to determine governance and distribution of shareholdings to the children when they have reached a mature standing.
Lastly, when undertaking a corporate reorganization or estate freeze, a trust is a useful tool in passing or allocating future value growth to the right successors or owners. There are numerous examples and family situations where this would be applicable.