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

The Bennetts are an illustrative family, but their structure is a common one. Following them from the original plan through to an eventual sale shows how the tax changes of recent years may affect a real trust.

An unexpected arrival

Outside a midsize factory in Guelph, Ontario sits a sign that reads: Bennett Manufacturing Ltd. The facility, which produces medical-grade tools for hospitals, has thrived for more than three decades under the ownership of David and Susan Bennett. But then, some years ago, David and Susan began to think seriously about the future. 

They implemented an estate freeze and established the Bennett Family Trust, a discretionary family trust that now holds the common (growth) shares of the company. The beneficiaries are David, Susan, and their two adult children. Emma, age 32, works full-time in the business as an operations manager and her brother Liam, 30, is a teacher in Ottawa and not involved in the company’s operations. 

The plan was simple: sprinkle dividends among the four beneficiaries each year to minimize the family’s tax bill and position the business for an eventual tax-efficient sale. And then the tax split on income arrived.

What changed

The tax on split income, or TOSI, was intended to curtail ‘income sprinkling’. For the Bennetts, it meant their annual tax minimization plan had been thrown off course. Under the new rules, dividends passed through the trust to Liam—who has no involvement in the company—were now taxed at the top rate, eliminating the benefit of directing income to him. The same dividends to Emma, who works in the business full-time, continued to be taxed at her own graduated rates. 

This imbalance concerned David and Susan. Where the previous rules allowed them maximum flexibility to direct income to their children, the new rules significantly increased the tax cost of doing so. Luckily, Liam visited often in the summertime and was able to take part in the discussions. It was clear to all that unless he surrendered his teaching position and returned to work for the family business, he could not receive regular income from the trust.    

However, the trust could still split income with Emma, providing a partial advantage. Her full-time role at Bennett Manufacturing meant dividends allocated to her flowed through the trust qualified for the excluded-business exception, and were therefore taxed at her own rates rather than at the top rate. Distressed, David and Susan visited their accountant to ask: does this mean Liam is no longer a beneficiary?

The answer was reassuring. While Liam would not benefit from receiving a yearly dividend allocation, he could still benefit in other ways. For example, if the family eventually sold the shares of Bennett Manufacturing, the trust could allocate the gain across David, Susan, Emma, and Liam. The Lifetime Capital Gains Exception (LCGE)—which provides relief for selling shares in a qualified small business corporation (QSBC), up to a maximum of $1,275,000 in 2026—can be multiplied by the number of beneficiaries named in the trust. This means four exemptions of $1,275,000 can be claimed, sheltering $5,100,000 of capital gains from tax, well beyond what a single shareholder could shelter alone. And this benefit extends to Liam too: the QSBC exclusion from TOSI does not depend on his working in the business.

When planning for the future business sale, the Bennetts will also review any anticipated Alternative Minimum Tax (AMT) implications with their accountant, and plan their strategy for recovery of any AMT that applies. 

The takeaway

David and Susan’s trust structure continues to make sense for their family. While the tax benefits of dividend sprinkling with Liam are gone, it is still possible with the family members active in the business. More significantly, the trust has set them up for significant tax savings when they’re ready to sell. 

Through the trust and their role as trustees, the company’s future growth is shared with the next generation while David and Susan continue to steer and govern the business and decide if and when value is distributed. Having options is helpful and they remain in charge.

As David and Susan learned, the question is not whether a family trust offers advantages, but whether the advantages apply to your situation and justify the cost and complexity of maintaining one. A trust created years ago purely to split income may no longer earn its keep and may be worth revisiting. However, a trust that anchors a succession plan, a business sale, or the careful stewardship of family wealth may be as valuable as ever.

Keep reading

For the rule changes behind this story, see Are Family Trusts Going Extinct?
For the full list of situations where a trust still delivers, see 4 Modern Uses for Family Trusts.