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Corporate solicitor, tax expert integral to family trust plan

For some families, trusts can prove to be an important tax-saving tool, but there are a number of key legal and financial requirements to keep in mind when considering this strategy, Vancouver corporate lawyer Jonathan Reilly tells AdvocateDaily.com.

Generally, says Reilly, founder of English Bay Law Corporation, trusts allow business income to be divided between adult family members, which can be particularly useful when your children are at college or university.

“It allows income to be allocated to the children, who are in a lower tax bracket than the parents, so the total tax burden for the family is reduced compared to a situation where all the income is taxed in the hands of just one person," he says.

For this strategy to work, says Reilly — whose firm provides the "nuts and bolts" for implementing a trust following tax advice from an accountant or lawyer — the company generating the income must be incorporated and a family trust established to which the profits can be paid.

He explains it would then distribute income to beneficiaries according to the terms of the trust document, which usually allows the trustees to decide which beneficiaries receive distributions and how much — for example, minor children might get nothing, adult children some and the parents more. 

“The income each adult receives is taxed based on that person's total income tax circumstances. The effect is to allow the parents to split revenues with the other beneficiaries of the trust,” says Reilly.

However, he cautions, there is a catch. 

“At common law, it was considered undesirable for such a trust to exist in perpetuity, so it applied the ‘rule against perpetuities’ to ensure that its maximum lifespan would only be as long as ‘a life in being, plus 21 years.’ 

“’Life in being plus 21’ is not a clearly defined period of time, so in drafting trust documents, it is usually specified that the trust has a specific lifespan of 80 years,” says Reilly.

The Income Tax Act also requires a trust to experience a “deemed disposition” period. 

"Every 21 years, the trust must be valued and capital gains taxes become due. Specifying an 80-year life for a trust also ensures it will not cease to exist on its first or even later 21-year anniversary. This gives the trustees time to make arrangements to ‘roll over’ into a new trust for another 21 years,” he says.

There are also legal and accounting costs to setting up a family trust as well as annual bookkeeping and accounting expenses related to keeping records and filing returns, says Reilly, along with additional tax, legal and accounting costs every 21 years.

As a result, he says, “to be of value, they need to save more than they cost to set up and administer and for that to be the case, there is a threshold level of income. That ceiling varies depending on each person’s specific tax circumstances, but it is probably safe to say it's not worth considering unless annual income is well over $100,000,” he says.

For those who think a trust might be of benefit to their family, Reilly suggests having an initial discussion with a tax expert.

"That advisor will create the plan for what will be required — whether there is an existing company or one needs to be incorporated, whom shares will be issued to or transferred from, how shares will be valued and paid for, and so forth.” 

That plan, he adds, would be reviewed by a business lawyer to ensure the tax planning is possible within the bounds of the corporate circumstances.

The lawyer then puts the pieces together — drafting the trust agreement, preparing the incorporation and the share subscriptions or transfers, Reilly says.

“Family trusts are not appropriate for everyone, but they can be an important tax-saving tool for many. Implementing a family trust should be done in consultation with a tax expert and a corporate solicitor for the nuts-and-bolts required to put the plan together,” he says.

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