“My business partner and I each set up a family trust after our accountant brought the idea to us. It was an expensive proposition—tens of thousands of dollars—and involved a lot of paperwork and sitting with our legal and accounting teams. But the benefits far outweigh the costs.
“One benefit is the lifetime capital gains exemption [$800,000 in 2014] if we were to sell the business. If my 50% share of the company were worth $3 million, I’d owe taxes on $2.2 million if I used only my individual exemption. But my wife and daughter are beneficiaries of the trust, so they each get an exemption. Our total is $2.4 million, so we’d be taxed on only $600,000.
“Our daughter gets an exemption even though she’s just 15 months old. When she grows up, if she becomes an entrepreneur and then sells her company, she won’t have her exemption because I’ll have used it up already. But that’s something we can talk about in 20 years.
“The trust also allows us to do income-splitting to make use of lower tax brackets. You have the discre- tion to pay up to $50,000 per year in dividends to any beneficiary over 18—your spouse, children and other family members. This is a CRA-accepted method of income-splitting, as opposed to companies that try to pay salaries to family members who don’t actually work for the business.
“Dividends are taxed far less than salaries are, so we don’t need to take as much out of the company to realize the same amount of net earnings. That allows us to reinvest more in the business and rely less on outside financing. So, it’s an intelligent way to build wealth.”