Family Trust
A legal structure used to hold shares for the benefit of family members, used in estate planning to multiply the Lifetime Capital Gains Exemption on the sale of a business.
Definition
A family trust is a separate legal entity created by an individual (the settlor) who transfers property — generally shares of a corporation — to a trustee, who administers them for the benefit of designated persons (the beneficiaries), usually family members. The trust holds the shares without being their economic owner in the tax sense; it’s the beneficiaries who ultimately benefit from the value.
In French-language Quebec documentation, you’ll see fiducie familiale used for the same concept.
In Canada, family trusts are governed by the federal Income Tax Act and by Quebec’s Taxation Act. They have an effective tax life of 21 years, after which a deemed disposition of the property takes place.
Why a family trust matters in a business sale
The main advantage for an SME owner planning to sell is the multiplication of the Lifetime Capital Gains Exemption (LCGE). Each Canadian individual can exempt approximately $1.25 million of capital gains (indexed annually) on the sale of qualified small business corporation (QSBC) shares. If a family trust holds the shares and distributes the gain to four eligible beneficiaries, the potential tax savings can reach several hundred thousand dollars.
This mechanism is particularly relevant in Quebec, where the combined marginal tax rate on capital gains is among the highest in Canada. For an owner whose business is worth $3 to $10 million, the difference between a sale with and without a family trust can represent a very significant tax gap.
That said, the trust has to be set up well before the transaction — ideally two to five years ahead. The Canada Revenue Agency (CRA) and Revenu Québec scrutinize structures set up at the last minute. A trust created a few months before a sale risks being challenged as a tax avoidance arrangement.
What every seller should know
- The family trust has to be established several years before the sale to be credible in the eyes of the CRA and Revenu Québec. If you’re considering a sale in the next few years, consult a tax advisor now.
- Each trust beneficiary can potentially use their own Lifetime Capital Gains Exemption (~$1,250,000), which considerably multiplies the tax benefit.
- The 21-year rule imposes a deemed disposition of property held by the trust. If your trust is approaching that deadline, specific planning is needed before the sale.
- Setting up and administering a trust involves costs (legal, accounting, annual tax returns). These costs are generally modest compared to the tax savings realized at sale.
This text is informational. Consult a tax advisor for your specific situation.