Introduction
The question occasionally arises among incorporated professionals and business owners: is a family trust a better vehicle than a corporation for accumulating and distributing wealth among family members? The answer depends significantly on the post-2018 TOSI rules, the type of income involved, and the flexibility required — but the comparison is worth understanding directly.
What a Family Trust Is
A discretionary family trust is a legal arrangement where a trustee holds property for the benefit of named beneficiaries — typically family members. The trust is not a separate taxpayer in the same sense as a corporation; it files its own T3 return and pays tax on income retained in the trust, but income distributed to beneficiaries is generally taxed in the beneficiaries' hands — allowing income splitting where beneficiaries have lower marginal rates.
What TOSI Did to Family Trusts After 2018
Before 2018, a family trust holding shares of a family corporation allowed dividends to be distributed to adult beneficiaries — a spouse, adult children — at their lower personal marginal rates. Income earned by the business flowed to the trust and was taxed in the hands of whoever the trustee allocated it to.
The TOSI rules (split income rules) implemented in 2018 largely eliminated this advantage for working-age beneficiaries who are not actively engaged in the business. Under TOSI, income allocated from a trust to a family member who does not meaningfully participate in the business is taxed at the top marginal rate — regardless of the beneficiary's actual income level.
The trust's income-splitting advantage for non-participating family members is essentially gone for most typical incorporated professional scenarios.
Where Family Trusts Still Have Value
Income splitting for genuinely participating family members: Where an adult child or spouse is meaningfully engaged in the business — not just nominally — TOSI exemptions may apply, allowing dividends at their lower marginal rates.
Estate planning flexibility: A discretionary trust allows the trustee to allocate capital gains among beneficiaries — including to multiple individuals each claiming their own LCGE on a qualifying share sale. A trust that holds shares of a family corporation can, on a sale of the business, allocate the capital gain to multiple beneficiaries each claiming their own $1.25 million LCGE. This is the most powerful remaining use of family trusts in private corporation tax planning.
Creditor protection: Trust assets are generally protected from the personal creditors of the beneficiaries — a distinction from assets held personally or inside a corporation that may be accessible to the corporation's creditors.
US persons in the family: Where any beneficiary is a US citizen or US resident, the family trust creates significant US tax complexity (PFIC, grantor trust rules) that makes the structure much less attractive.
The Corporation: Simpler, More Straightforward for Most
For most incorporated professionals whose primary goal is tax deferral and wealth accumulation — without complex multi-generational estate planning — the corporation (with a holdco for investment assets) accomplishes the same goals with less administrative complexity.
The corporate structure:
• Provides the SBD deferral advantage on active income
• Holds investments with RDTOH tracking
• Uses the CDA for tax-free distributions on capital gains
• Is maintained with a T2 and corporate compliance — no T3, no trustee obligations
The family trust adds a layer of trust law, trustee obligations, T3 filing requirements, and — post-TOSI — limited income-splitting benefits for most professional scenarios. For professionals who are not planning a multi-beneficiary LCGE multiplication strategy on a future business sale, the trust provides little incremental value.
When the Trust Makes Sense
For a professional with adult children who are or will be actively engaged in the business, and whose estate plan includes a future business sale where multiple LCGE claims would be valuable, a family trust holding shares of the professional corporation is worth establishing — provided it is done correctly and the TOSI analysis supports the income-splitting intent.
For a professional with a spouse and minor children, no active family involvement in the business, and a primary goal of accumulating investment wealth efficiently, the holdco structure accomplishes those goals without the trust layer.
When to Speak With a CPA
The decision between a family trust and a corporation is both a tax decision and an estate planning decision. A CPA in consultation with the estate lawyer is the right structure for this conversation — particularly where a business sale is anticipated in the medium term and LCGE multiplication is a potential planning goal.