Family trust as shareholder

It is common in family business structures that the shareholder of the company is not the founder of the company directly, but rather a family trust, with the founder and all family members as beneficiaries. The trust can become a shareholder at the start of the business, but more often it will become a shareholder on the occasion of a share freeze, when the business has reached a certain value and profitability. Here is an overview of three advantages of having a family trust as a shareholder.

Asset protection

Legally speaking, a trust is not a "person" as is, for example, a corporation. Rather, a trust is a set of legal relationships whereby trustees administer property for a particular purpose or purposes for the beneficiaries named in the trust deed. The property administered is held by the trustees and title to the property is established in their name( as trustee). The Civil Code of Québec provides that the trust patrimony "constitutes an autonomous patrimony by appropriation distinct from that of the settlor, the trustee or the beneficiary, in which none of them has any real right.

Thus, the trust makes it possible, with certain exceptions, to protect certain assets, in particular shares in a company, from creditors. Since the shares are not part of the assets of the settlor, the trustees or the beneficiaries of the trust, and since the assets are the common pledge of the creditors, they are in principle safe from seizure in the event of civil proceedings or bankruptcy.

Income splitting

Family trusts are generally structured so that they are 'discretionary'. This means that the trustees have, by virtue of the powers conferred on them by the trust deed, complete discretion to allocate income earned by the trust to any of the beneficiaries. Subject to the tax rules against income attribution, the trustees can therefore allocate dividends received by the trust from the company to family members in a beneficial manner, avoiding the marginal tax rate.

A similar result can be achieved with discretionary dividend shares, participating or not.

Multiplying the capital gains exemption

The capital gains exemption allows, limited to $913,630 per person in 2022, a shareholder to sell his or her shares in a small business corporation (SBLC) free of any taxable capital gains. The advantage of the family trust is that it allows the capital gain to be allocated to several beneficiaries (e.g. spouse and children), so that each can use their capital gains exemption and therefore minimize the tax impact of the sale.

Technical details

It is important to note that the trust does not constitute a legal person, and cannot be a party to a contract or be designated as the owner of property in the deeds. The trustee commits the trust patrimony by acting "in the capacity" of trustee, and title to the property forming part of the trust patrimony is established in the name of the trustee (art. 1278 of the Civil Code of Québec). The securities register and share certificates should not designate the trust as a shareholder per se.