Should I Wind Up My Family Trust?
With the Liberal government implementing tax changes relating to income sprinkling to family members, many taxpayers have questioned whether they should wind up their family trusts.
The ability to pay dividends to family members (often referred to as dividend sprinkling), has been significantly limited. There are, however, still some opportunities to dividend sprinkling within a family situation, these being:
- A business owner’s spouse (if the business owner is 65 or older)
- Adults age 18 or older who are engaged in the business on a regular and continuous basis
- (generally more than 20 hours per week)
- Adults age 25 or older who own 10% or more of the votes and value of a corporation that earns less than 90% of its income from providing services, and that is not a professional corporation (e.g. lawyer, accountant)
- Salaries can still be paid to family members from a business. However, for the business to have the ability to deduct the payment, this payment must be for services provided to the business.
Family Trusts Still Have the Following Benefits:
- ESTATE FREEZE
An estate freeze provides the ability to have the future growth of a company accrue to a trust. This allows the taxpayer to freeze (cap) their growth, and therefore, the tax in their estate on the deemed disposition resulting from death. The growth value in the trust can be distributed tax free to the beneficiaries of the trust (normally being the next generation). This defers the tax liability to the next generation.
- CREDITOR PROTECTION OF ASSETS
Having assets held in a family trust can increase credit or protection of this value. This level of protection will largely be dependent on the trust structure.
- BC WILLS VARIATION ACT
By having the growth value of the business accumulate in a trust, the value is not exposed to the BC Wills Variation Act, as the value does not flow through the will.
There are still significant benefits of having a family trust in place. However, with the income sprinkling rules, there may be some trusts where the main focus was income sprinkling with family and therefore, the maintenance of the trust may not be beneficial. Each situation is unique and should be analyzed to determine how your trust integrates into your overall plan.
Disclaimer: This is for general information only, consult your tax advisor prior to any implementation.