Denika Heaton, BBA, JD, TEP, CEA Tax and Estate Planning Specialist, Private Wealth

Chris Hanley, CPA, CA, CFP, TEP Tax and Estate Planning Specialist, Private Wealth

A series of tax changes has steadily reduced the income-splitting benefit that once motivated many family trusts. To dive deeper into those changes, start with our companion piece, Are Family Trusts Going Extinct? If you already know about the tax rules changes and want to understand where family trusts still offer value, read on: these are uses that endure.

The tax changes did not dismantle the estate, business succession, and asset preservation planning cases for trusts. In several common situations, a family trust remains immensely valuable and may be difficult to replicate those benefits in any other way. Note that some of these must meet other specific requirements to serve the trust’s intended purpose.
 

Splitting income from a family business through a trust remains effective wherever the income falls within one of the exclusions from tax on split income (TOSI), discussed in the previous article. 

A common exclusion for family businesses is distributions to a family member who is genuinely active in the business, or was or was so involved for five prior years. The excluded-business exception relies on real, substantial involvement, and dividends directed to such a beneficiary continue to be taxed at the individual’s graduated rates.
 

Where the trust holds a portfolio of public securities and the investment return comfortably exceeds the locked-in prescribed rate, the surplus may still be distributed to lower-bracket family members, including minor children whose income would otherwise attract attribution. A loan established during the period of the 1% prescribed rate is locked in at that rate and can be maintained despite recent rate increases. The arithmetic for a new loan, with the prescribed rate currently at 3%, may also still be viable. This requires careful structuring and an honest assessment of expected returns.

Perhaps the single most significant tax advantage of a family trust is its ability to multiply the Lifetime Capital Gains Exemption (“LCGE”) on the sale of a business. The LCGE lets each individual shelter a substantial amount of capital gains, $1,275,000 in 2026 (indexed annually to inflation), on the disposition of qualifying small business corporation shares. Because the exemption is available per individual, a trust that holds shares in a qualified small business corporation (QSBC) can allocate the resulting capital gain on sale among several beneficiaries, allowing each to apply their own exemption. This is one of the few areas where a trust’s tax benefit has remained, and it interacts favourably with TOSI, since QSBC capital gains are excluded from those rules.

Two cautions need to be considered with this strategy. First, qualifying for the LCGE requires the shares to meet strict asset and holding-period tests, and “purifying” a corporation so that it qualifies can take time, which requires multi-year planning prior to sale. Second, utilizing the LCGE can itself trigger Alternative Minimum Tax (AMT), so the interaction should be modelled before a sale. The exemption remains one of the most powerful tools in Canadian tax planning for business owners and rewards those who prepare early.
 

A discretionary trust uniquely allows control of an asset to be separated from beneficial ownership of it. The trust document specifies how and when value flows to the beneficiaries, or provides discretion for the trustees to decide, while the beneficiaries hold the beneficial economic interest without holding the reins. No other common structure achieves this as cleanly.

This separation is what makes a trust the natural partner to an estate freeze. A business owner can lock in (“freeze”) the current value of their company and direct future growth into a trust for the next generation, while remaining a trustee, and often retaining voting control, so that they keep control of the business even as its future growth accrues to their children. 

This separation of control (and legal ownership) of trust assets from those who enjoy the benefits can offer many benefits to families without a family business as well. A family may use a family trust, or other similar types of specialized trusts, for purposes including: 

• Management of assets: For a beneficiary who is not ready, or unable, to manage a windfall—whether a young adult, a child who is not financially capable, or a family member with a disability—without placing the assets directly in their hands and possibly preserving eligibility for government benefits.
• Blended families: A trust can provide for a current spouse during their lifetime while preserving capital for children from a previous relationship, balancing competing claims that a simple Will may struggle to reconcile.
• Probate and privacy: Assets held in certain trusts may pass outside the estate of an individual on death, reducing probate fees and keeping the details of who receives what private, unlike a Will, which becomes a public document.
• Creditor and matrimonial protection: Properly structured, a trust can offer a measure of protection for family assets, which can matter for beneficiaries in higher- risk professions or uncertain relationships.
   

Real and substantial reasons remain for Canadian families to use trust structures. Income splitting still works where a beneficiary is genuinely active in a family business (among other exclusions) or where a prescribed rate loan spread holds up for splitting investment income. The ability to multiply the Lifetime Capital Gains Exemption across several beneficiaries on a business sale is even more valuable as the exemption grows. And the ability to separate control from beneficial ownership, the feature underpinning estate freezes, succession planning, and protective planning for vulnerable beneficiaries, is something no tax change has affected.

The tax savings case for a family trust has narrowed, but the business succession and estate planning, and asset protection case often has not; this requires balancing these advantages with the costs and complexities of the structure.

Stay Tuned

To see several of these uses at work in a single structure, read Meet the Bennetts: A Family Trust Case Study.