An introduction to family trusts

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A trust is a legal relationship in which one party holds and manages property for the benefit of others. A family trust is simply a trust created during your lifetime whose beneficiaries are family members, with its terms set out in a trust deed. Three roles define it: the settlor, who establishes the trust and contributes the initial property; the trustee(s), who control and administer the assets; and the beneficiaries, who benefit from them.

Why families use them

Estate planning & freezes. In a classic estate freeze, the founder exchanges their common shares for fixed-value preferred shares, and the family trust subscribes for new common shares at nominal cost. The founder's value — and eventual tax bill on death — is "frozen" at today's number, while future growth accrues to the next generation inside the trust, with the founder keeping control through voting shares or the trustee seat.

Multiplying the capital gains exemption. Each individual has a lifetime capital gains exemption — $1.25 million for qualifying small business shares (for dispositions after June 24, 2024). When a business held through a trust is sold, the gain can be allocated among several beneficiaries, each claiming their own exemption — a family of four could shelter roughly $5 million. The shares must meet strict qualification tests, so this is planned years ahead, not at the deal table.

Asset protection & control. Beneficiaries don't own trust assets — they have an interest in them. A discretionary beneficiary's creditors, or a marriage breakdown, generally can't reach what the trustee hasn't distributed — and staged distributions protect a child who isn't ready, or a vulnerable family member, from a lump sum. One honest limit: a trust doesn't shield the contributor from their own existing creditors.

Income splitting — what's left of it. Once the headline reason, now heavily fenced in by the TOSI rules. What remains: splitting with a spouse once the owner is 65+, allocations to family who genuinely work in the business (roughly 20+ hours a week), and capital gains qualifying for the exemption, which generally escape TOSI. The days of sprinkling dividends to a student child are over.

Bypassing probate. Trust assets don't form part of your estate, so they pass outside your will — no BC probate fees (about 1.4% of estate value), no court delays, no public record of who received what. On meaningful holdings, the probate saving alone can cover years of trust costs.

Succession, decisions kept open. A discretionary trust moves value to "the next generation" without deciding today which child gets what — the trustee allocates as life unfolds: who joins the business, whose needs change.

The tax rules to weigh

Tax on split income (TOSI). Since 2018, income "split" to family members is taxed at the top rate unless a specific exclusion applies. Every plan gets tested against TOSI first.

The 21-year rule. Every 21 years a trust is deemed to dispose of its capital property, potentially triggering accrued gains — a critical date to plan for, not discover.

Attribution rules. Income or gains can be attributed back to the contributor — a spouse, or where minor children are involved — undoing the intended split.

Top-rate tax on retained income. Income kept inside the trust is taxed at the top marginal rate, so income is usually allocated out to beneficiaries and taxed in their hands.

Costs and administration

A trust carries real obligations: legal set-up, a separate annual T3 return, trustee record-keeping, and professional fees. The honest test: worthwhile when the planning value clearly exceeds the cost and complexity of maintaining it — and not before.