Should Your Shareholders be a Family Trust or a Holding Company?

Tax Advice words and bullseye and Preparation for individuals and business ATS Accounting Edmonton

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The big sign that your business is growing and reaping success is when you incorporate it. It is not just a big step, it is a massive step. From a sole proprietor or partnership, you have officially converted your business into a company with a business structure.

One of the many questions you are faced with is – should your company’s shareholders be a family trust or a holding company. Businesses are often plagued by this question not just at the beginning of the incorporation, but also years later too.

Family Trust?

A family trust is a discretionary trust set up to control and protect the family assets, which in this case is your incorporated business. It is set up for the benefit of the family group. Your family, you and your business access certain financial benefits by doing so, such as finances are distributed to beneficiaries.

By far, the biggest advantage is the tax relief that comes with a family trust. The dividends paid out to the family trust are allocated to the beneficiaries in the lower income tax brackets. Beneficiaries with no income source can receive $40,000 of dividends and pay little or no income tax. Dividends, which allocated to a corporate beneficiary for non-personal use, flow to the corporate beneficiary on a tax deferred basis. This is good for corporations that generate excess cash. Family member’s Capital Gains Exemption (CGE) can be accessed. Each CGE can shelter up to $813,000 of capital gains at the sale of a small business corporation shares and each CGE shelters $200,000 of income tax.

Holding Company?

If you are not opting for a family trust, you are opting for a holding company. A holding company owns the shares of another company and controls that company. A holding company is suited to manage shareholders and the company, and does not produce goods or services itself.

A holding company also offers tax advantages. Shareholders can defer paying income tax until the earnings are withdrawn at a later date. This allows shareholders to withdraw funds at the right time and save tax; for example withdrawing after retirement to access a lower tax bracket. The full amount of the dividends can be reinvested by the holding company.

When you sell shares, the company may qualify for CGE, but only for $750,000.

If the business fails, you can claim an Allowable Business Investment Loss, a loss that is deducted at any source of income.

Which to Choose?

In these three cases, you may prefer to opt for a holding company:

◘ You may not have children or close family members
◘ You also may not have children or family members you can trust
◘ Your children may be too young and allocating dividends to them brings on the kiddie tax
◘ In such cases, you may prefer to a family trust:
◘ Keep the wealth and assets within the family
◘ Avail of tax benefits
◘ Financially secure the future of the family

Both holding company and family trust offer a structure to manage your business.

Ultimately, your business has its own unique situation. To be sure that you are selecting the right choice, it is best to take advice from an experienced accountant.

ATS Accounting & Tax Edmonton has experienced financial advisors who will help you with your business’s financial matters. Our team of dedicated experts knows the specific risks you may face and help ensure your business is protected.

Ready to get started? For more information about our accounting and tax services, book your free 15-minute consultation by calling us at 780-484-4006 or contacting us online.

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