Family trust

A family trust is a legal arrangement that places assets (often shares in a business) in the hands of trusted individuals, the trustees, who are responsible for managing them for the benefit of the family, the beneficiaries. The person who establishes the trust is the settlor. It serves to prepare for succession and protect the family’s wealth.

At a glance

Three roles: the settlor (who creates it), the trustees (who manage it), and the beneficiaries (often the family, who benefit from it)
Often combined with an estate freeze (freezing the current value of the business) to capture future growth
The 21-Year Rule: Every 21 years, the trust is deemed to have sold its assets, which may result in a tax liability
It files its own tax return every year (T3 forms for the federal government and TP-646 forms for Quebec)
Starting with the 2023 tax year, expanded reporting requirements require most trusts to file a T3 form each year, even if they have no income, along with the schedule identifying the beneficiaries

Why it matters

Think of a trust as a family safe managed by trusted individuals: the business deposits its future growth into it, and a flexible decision is made later as to which family member will benefit from it. For a Quebec entrepreneur, it’s primarily a tool for succession planning and protection: it can capture the growth after a estate freeze, maintain flexibility regarding who receives what, and sometimes open the capital gains exemption (tax savings on the sale) for multiple family members: by dividing the proceeds of a sale among three beneficiaries, you can aim for up to approximately $3.75 million in tax-sheltered gains, three times the $1.25 million limit. The distribution of current income, however, remains subject to the TOSI. But it comes with real obligations: an annual T3 federal tax return (see the CRA Guide T4013) and TP-646 in Quebec, tax rules to follow, and the 21-year deadline to plan for. If mismanaged, it loses its benefits. We’re here to support you: Bankeo will connect you, for free, with a vetted accountant or Chartered Professional Accountant to determine whether a family trust is the right choice for your situation.

Frequently asked questions

What exactly is a family trust?

It is a legal arrangement in which a person, the settlor, entrusts assets (often business shares) to trustees, who manage them on behalf of the family, the beneficiaries. In business, it is primarily used to hold growth shares after an estate freeze: the trustees retain control, and the decision of who receives what remains open. It can also protect certain assets and facilitate the sale of the business.

What is the “21-year rule”?

Every 21 years, the law treats the trust as if it were selling its assets at their current value, which can trigger a large tax bill all at once, even without an actual sale. Therefore, planning is done before this deadline, often by transferring the assets to the beneficiaries. This is a date to mark on your calendar as soon as the trust is established.

Is a family trust a good investment for me?

It involves setup costs and an annual maintenance fee, so it’s worth it when there’s a real need: a growing business, succession planning, or a sale on the horizon. A professional will assess whether it’s worth the investment. We’re here to support you: Bankeo will connect you, for free, with a vetted accountant or CPA to analyze your situation.