Family Trust

A family trust is a discretionary trust used in Canadian tax and estate planning in which a trustee holds assets for the benefit of a defined group of beneficiaries — typically the business owner, their spouse, adult children, and a family holding corporation. The trustee has discretion each year over how much income or capital each beneficiary receives, allowing income and capital gains to be directed to beneficiaries in lower tax brackets.

In the context of business sales, family trusts are used to hold shares of the operating company with the goal of allocating capital gains on a future sale among multiple beneficiaries — each of whom may claim their own Lifetime Capital Gains Exemption (LCGE) if the shares qualify as QSBC shares. This technique, known as LCGE multiplication, can significantly reduce the combined tax burden on a sale by sheltering gains across several family members rather than concentrating them in the hands of the founding owner.

To be effective, the trust must be established and the shares subscribed at low or nominal value before the business has appreciated significantly — retroactive restructuring at a high value does not achieve the same result. The trust must also hold the shares for the 24-month period required for QSBC qualification, and attribution rules must be managed carefully to avoid gains being attributed back to the settlor. Family trusts are also subject to a 21-year deemed disposition rule, which requires gains inside the trust to be reported and taxes paid every 21 years unless the assets are distributed or rolled out before that date.

See also: Estate Freeze, LCGE, QSBC, Attribution Rules, CCPC.