A family trust is one of the most versatile tax and estate planning tools available to Canadian business owners and high-net-worth families. When structured correctly, it can split income among family members, multiply the Lifetime Capital Gains Exemption (LCGE) on a business sale, and transfer wealth across generations with a degree of creditor protection. However, the 2018 income-sprinkling rules — formally called the Tax on Split Income (TOSI) — have significantly narrowed who actually benefits. Understanding exactly where the opportunities remain is essential before committing to the setup costs.
A family trust is an inter vivos discretionary trust — meaning it is created during the settlor's lifetime, and the trustee has full discretion each year over which beneficiaries receive income or capital, and in what amounts. The three key parties are:
Because the trustee decides allocations annually — after the year's results are known — a family trust offers planning flexibility that no direct shareholding structure can replicate.
The most common structure places a family trust above an operating company (Opco). The trust owns shares of a holding company (Holdco), which in turn owns Opco. When Opco earns income, it pays a dividend upstream to Holdco. Holdco then pays an inter-corporate dividend (tax-free under the dividend refund and Part IV tax mechanism) to the family trust. The trustee then allocates that dividend income among beneficiaries — an adult child in a lower bracket, the business owner's retired parent, or a spouse with limited other income.
Each beneficiary reports the income on their own return and pays tax at their own marginal rate. In Alberta, the difference between the top rate (48%) and the lowest bracket (25%) represents a potential saving of over $23,000 per $100,000 of income. Multiply that across several beneficiaries in lower brackets and the annual tax savings can be substantial — but only where TOSI does not apply.
Since 2018, the Tax on Split Income rules apply to adult family members of private business owners. If the trust allocates dividend income to an adult beneficiary who is related to the business owner and is not actively engaged in the business for at least 20 hours per week during the year (or in any five prior years), that income is taxed at the highest federal marginal rate regardless of the beneficiary's actual income level. TOSI effectively eliminates income splitting for passive or minimally involved family members.
TOSI does not apply to:
Practically speaking, after TOSI the main income-splitting benefit that survives for a typical family trust structure is the LCGE multiplication strategy — not annual dividend sprinkling to adult children who work outside the business.
Minor children — those under 18 at the end of the tax year — face their own restriction. Income from a trust allocated to a minor child is generally attributed back to the settlor (or the parent who transferred property to the trust) under the income attribution rules, and taxed in the settlor's hands at their marginal rate. This eliminates any income-splitting benefit for young children.
There is an important exception: capital gains allocated to minor beneficiaries are generally not subject to the same attribution rules in many trust structures, making it possible to flow QSBC share capital gains to minors. However, once a minor is under 18, those capital gains may be subject to the kiddie tax (TOSI) rules which tax them at the top rate unless the source is an excluded amount. This area is technically complex and requires careful legal and tax advice.
The corporate-trust structure that accountants at Swift Accounting in Calgary most commonly see for business owners works as follows: Family Trust holds shares of Holdco, which holds shares of Opco. On a sale of the business, the buyer acquires Opco shares. Each adult beneficiary of the trust is allocated a portion of the capital gain arising on the QSBC shares. Each beneficiary can then claim their own LCGE — $1,250,000 for 2025, indexed annually — against their allocated share of the gain.
A family with four adult beneficiaries eligible to claim the LCGE could shelter up to $5,000,000 of capital gains from tax. At a 50% inclusion rate and a 48% top rate, that represents approximately $1,200,000 in tax savings compared to a single owner claiming one exemption. This is the dominant reason incorporated business owners establish family trusts.
For the LCGE to apply, Opco shares must qualify as QSBC shares at the time of sale: the corporation must be a Canadian-controlled private corporation with 90% of assets used in an active business at the time of sale and 50% for the preceding 24 months. Purification planning — stripping excess passive assets from Opco prior to sale — is typically required.
Every inter vivos trust is subject to a deemed disposition every 21 years. On each 21st anniversary, all property in the trust is treated as sold at fair market value. Without planning, this creates a large capital gain in the trust with no corresponding proceeds — a tax bill with no cash to pay it.
The solution is to roll trust assets out to beneficiaries before the 21st anniversary under a section 107(2) tax-deferred distribution. Beneficiaries receive the shares at cost, deferring the gain until they sell. This rollout must be planned carefully — it requires corporate and trust legal work, and CRA may scrutinize the transaction if it appears to be motivated solely by the 21-year rule avoidance. Trustees should start planning at least two to three years before the anniversary date.
Establishing a family trust requires a legal trust deed drafted by a lawyer, typically costing $2,000–$5,000 depending on complexity. Associated corporate reorganization work (issuing new share classes, transferring shares, tax elections) adds to that cost. Once in place, the trust requires an annual T3 Trust Income Tax and Information Return filed by 90 days after the trust's year end. Trusts with assets over $3 million or with professional trustee arrangements face additional reporting under the expanded T3 beneficial ownership rules that came into force in 2023. Budget $500–$1,500 annually for T3 preparation depending on the number of allocations and complexity.
Despite the TOSI restrictions, family trusts remain widely used because:
The team at Swift Accounting Calgary works with business owners to model the after-tax outcome of a trust structure before the legal costs are incurred, ensuring the setup cost is justified by the projected tax savings.
A family trust is not a one-size-fits-all solution — the right structure depends on the number of adult family members actively involved in the business, your anticipated sale timeline, the current value of your shares, and your estate planning goals. If you are a business owner in Calgary or across Canada and want a clear analysis of whether a trust structure makes sense for your situation, contact Swift Accounting to schedule a consultation. We will model the numbers before you spend a dollar on legal fees.
Only if they are actively involved in your business. Under the Tax on Split Income (TOSI) rules in effect since 2018, dividend income allocated to adult family members who are not engaged in the related business for at least 20 hours per week during the current year — or any five prior years — is taxed at the highest marginal rate. If your adult children work full-time in the business, the income-splitting benefit survives. If they are not involved, TOSI eliminates the benefit for regular dividend income. The primary opportunity that survives TOSI is the capital gains allocation on a business sale for LCGE multiplication purposes.
The Lifetime Capital Gains Exemption (LCGE) shelters capital gains on the sale of qualifying small business corporation shares. For 2025 the exemption is $1,250,000 per person, indexed annually. If a family trust allocates the capital gain from a business sale among four adult beneficiaries, each beneficiary can claim their own $1,250,000 exemption — sheltering up to $5,000,000 in total. Without a trust, a sole shareholder claims one exemption against one gain. The difference can be over $1,000,000 in tax on a typical mid-market business sale, which is why many incorporated business owners establish trusts years before a planned exit.
Generally yes, with important caveats. Assets held by a trust are not beneficially owned by any individual beneficiary until the trustee exercises discretion to allocate them. A beneficiary's personal creditors typically cannot seize trust assets that have not yet been distributed. However, there are exceptions: fraudulent transfer rules apply if assets are moved into a trust to defeat known creditors, and professional liability in certain regulated industries may reach trust assets depending on the province and the nature of the claim. Creditor protection is a secondary benefit of a trust, not a guarantee, and proper legal advice is required.
Setup costs typically range from $2,000 to $5,000 for the trust deed and associated legal documentation, plus additional corporate legal costs if shares need to be reorganized or new share classes issued — which is usually necessary. Annual maintenance involves filing a T3 Trust Income Tax Return, which costs approximately $500–$1,500 per year depending on complexity. Trusts established after 2021 are also subject to expanded beneficial ownership reporting requirements, which adds some preparation time. In most cases the annual compliance cost is easily justified if the trust is used for an active LCGE multiplication strategy or meaningful income splitting with qualifying family members.
Our Calgary team handles personal tax, corporate returns, GST/HST, payroll, and bookkeeping.
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