Can I sell my business to a family trust?

Selling a business, or its shares, to a family trust raises tax and drafting questions. The Income Tax Act sections below do not forbid it. They decide who is taxed on the income and gains, and when, and the answer turns on the beneficiaries and the terms of the trust deed. Have a lawyer and an accountant review the actual trust before any price is set.

Attribution back to the seller

Under subsection 75(2), if a trust resident in Canada holds property on condition that it (or substituted property) may revert to the person it came from, may pass to persons that person determines after the trust is created, or, during that person’s existence, may not be disposed of except with that person’s consent or in accordance with that person’s direction, then income or loss from the property, and taxable capital gains or allowable capital losses on its disposition, are deemed to be that person’s while the person exists and is resident in Canada. Subsection 75(3) lists exceptions. Subsection 74.5(9) separately treats property lent or transferred to a trust in which another taxpayer is beneficially interested as lent or transferred to or for the benefit of that taxpayer, for section 74.5 and sections 74.1 to 74.4. Section 74.5 also sets exceptions, including subsection 74.5(1) for some transfers for fair market consideration.

The rollover covers named trust types

The CRA says you generally do not have a capital gain or loss if you give capital property to your spouse or common-law partner, a spousal or common-law partner trust, a joint spousal or common-law partner trust, or an alter ego trust. That list does not name a family discretionary trust, so ask your accountant how a sale to one is taxed. The page on family trust versus direct share transfer compares the two routes.

The trust has its own tax calendar

Subsection 104(4) deems every trust to have disposed of each property, other than exempt property, that was capital property (other than depreciable property) or land in a business’s inventory, for proceeds equal to fair market value, and to have reacquired it, at the end of listed days. Under subsection 104(4), those days include the day 21 years after the latest of January 1, 1972, the day the trust was created and certain other days, and each day 21 years after a later deemed disposition day. Subsection 104(5) has a similar rule for depreciable property. Shares held in the trust can therefore face recurring deemed dispositions. The CRA’s T3 guide says that, when required, the beneficial ownership information on Schedule 15 must be filed each tax year with the T3 return, even if nothing has changed; ask your accountant what your trust must file.