One of the most common questions I ask entrepreneurs and private company owners when I sit down with them for the first time is, “How have you structured your shares in your company?” This question is typically answered in the following ways:
I own all of the shares personally;
My spouse and I own the shares 50/50;
I am not sure.
Capital Gains Tax Exemption
Owners and shareholders of a private company have a great tax exemption available to them called the “lifetime capital gains exemption”. This exemption allows for the first $800,000 of capital gain from the sale of the shares of a private company to be tax exempt. While this is great, what if there was a way to spread this exemption across the rest of your family to allow for even greater tax savings? You can!
Definition of Family Trust: A family trust is created to benefit persons who are related to one another by blood, affinity, or law. It can be established by a family member for the benefit of the members of the family group. Family trusts acts as an instrument to pass on assets to future generations. Generally, they are established for asset protection or tax purposes.
By structuring your investment through a family trust from the outset (can be set up for around CDN $2,000-$5,000), you can spread the tax savings not only to you but also to your spouse, your children, and to any family members you wish to add to your trust. For example, if your spouse and three children are listed as beneficiaries of your family trust, you would be able to claim the first $4,000,000 (5 x $800,000) of capital gains from the sale of your private company shares tax-free.
Another big benefit of holding your private company shares through a family trust instead of personally is that a trust can provide liability-proofing. This liability-proofing is available because you technically no longer own those shares after they have been contributed to a family trust. The trust will own the shares, instead (personal ownership can be a big deal to some). You will still remain a trustee, however, and will be able to direct the assets within the trust.
Note: This article provides a general overview of the tax advantages of a Family Trust. If you are interested in pursuing this avenue, we recommend engaging a law or accounting firm with a specific tax practice to ensure you are complying with all of the frequent updates made to the Canadian Income Tax Act. While the overall setup is fairly straightforward, there are a number of criterion (such as needing to hold the shares for a minimum of two years) that need to be structured to ensure you are positioned to use your lifetime capital gains exemption when you sell private company shares.
Article by Chad Robinson.
You can read more about Chad Robinson here.