My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Tuesday, September 4, 2012

Private Corporations - Using a Family Trust to Fund University Costs

I have discussed the use of a family trust in two prior blogs – Introducing a Family Trust as a Shareholder in a Private Corporation and Should Your Corporation’s Shareholder be a Holding Company or a Family Trust?

Today, I have a back to school blog post on using family trusts to fund your child's University education where one of the shareholders of your private corporation is already a family trust or you plan to introduce a family trust as a shareholder.

I know that many readers of this blog do not have private corporations. I apologize in advance for the restricted nature of this blog post. But, this is a case where those who operate through a corporate entity have a significant income tax planning advantage. As I noted in this blog post, personal income tax planning is a fallacy for most Canadians.

I don’t have to tell anyone that raising children is expensive. One of the largest expenses is education. For purposes of this blog post, I will ignore whether you feel as a parent your child should pay for some or all of their post-secondary education and assume you intend to pay for as much of that education as possible.

Most parents at a minimum utilize a Registered Education Savings Plan (“RESP”) to help fund their children’s educations. RESPs are excellent educational funding vehicles. The government provides grants, investment returns grow tax-free and the investment income is taxed in your child’s hands, when they eventually use the funds for post-secondary education purposes (typically resulting in minimal income tax).

However, in many cases, parents do not have the funds available to contribute to an RESP on a yearly basis, or, where they have large families or children pursue lengthy and/or multiple degrees, an RESP may be inadequate to fund all their children’s educational needs. A family trust can be utilized to either fully fund your children's education or to fill the "funding gap".

Family trusts are typically either introduced upon incorporation, where the family trust subscribes for the initial common shares issued by the corporation, or at a later date (usually as part of an estate freeze) where a family trust subscribes for new common shares in the corporation after the estate freeze or reorganization.

I discuss the concept of an estate freeze in the Introducing a Family Trust as a Shareholder in a Private Corporation blog I note above. But quickly, the intent of an estate freeze is to lock in the current fair market value of the shares held by the current owner(s), typically the parents into new special shares. As the special shares have a set fair market value, the parent's future income tax liability is fixed based on the frozen value and any future growth of the corporation accrues for the benefit of the new common shares issued to a family trust or any new shareholder.

Whether a family trust acquired shares in the private corporation upon incorporation or upon an estate freeze is irrelevant; what is important is that once the family trust is in place and the corporation pays a dividend, the family trust can allocate the dividend it receives from the company to any beneficiary of the family trust that is 18 years of age or older (as a side note, when a beneficiary is allocated a dividend from the family trust when he or she is younger than 18 years, a punitive tax referred to as the “Kiddie Tax” eliminates much of the benefit of allocating dividends to these beneficiaries).

Assuming any part-time employment income the beneficiary child has earned during the summer or working part-time while at school is offset by the education tax credit he or she is entitled to as a result of the payment of tuition fees, a child 18 years or older can receive approximately $39,400 (in Ontario) in dividends from a private company tax-free. For example, if a family trust received dividends from the family business and allocates $39,400 to a child who is at least 18 years of age to pay for their University costs (tuition, books, rent, food, etc.) this could save the parent upwards of $12,000 in income tax. Alternatively, if a family trust allocated the $39,400 as two separate $19,700  dividends to two children over 18, no income tax would typically be payable. If a family trust receives $78,800 in dividends from the family corporation and allocates these dividends as $38,100 to two children, the parent could save as much as $26,000 in taxes.

It should be noted that there may be some tuition credits wasted under this plan when a dividend is paid (under the Income Tax Act, the tuition credits must be applied against taxable income until taxable income is nil, even if the credits are not required to reduce income tax to nil). If no dividend was paid, the child could potentially carryforward and/or transfer some of the credit to their parents. However, typically the forgone tax savings is minimal, but this issue must be considered.

Finally, parents must recognize that any money paid as dividends to your children, is legally their money. Thus, ideally, the money should be used to pay for University or College, to pay rent, to pay for a car, or any other expenses for the child. Any excess funds should be set aside for the child, maybe to help with a future house purchase.

There are many benefits of a family trust including the potential multiplication of the $750,000 capital gains exemption; however the funding of your children’s education is often the most practical and tax efficient.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.


  1. Any chance you could write a post about professional corporations (medical, dental, etc)? My wife and I are trying to decide whether we should have her incorporate or not. She is a physician in Ontario. I am not in the medical field but I am in the top tax bracket, thus would not benefit from receiving dividends. We have 3 children, but the oldest is only 6, so would not beneift from them receiving dividends. We have just paid off our mortgage and all other debts, and have our RRSP & TFSAs maxed out, so there is potential to start leaving excess funds within a corporate structure.

    1. Anon, I will keep in mind as a future topic.

      If you email me, see contact me just higher up on the right side I can send you an incorporation analysis prepared by my partner Aaron Schechter who specializes in medical PC's or I can arrange a discussion with him.

  2. Hi, I'm also medical (actually dental) professional with a Prof. Corp. and I am considering this. I am already leaving excess funds inside my corp and am wondering if that is the ideal place to save for my children's education... Do you think that leaving the funds in the corp and taking them out as dividends once the kids reach 18 outweighs the 20% grand on RESP's?

    Both myself and my spouse are in the highest tax brackets...

    1. JJ,

      Good question. I would suggest that if your children are shareholders or you make them so just before they turn 18 (speak to your accountant), then keeping the money in your corp is better,since you can pay them approx $40k in dividends a year tax free, although I would have to run numbers to confirm my suspicion. I never ran numbers, since I used a combination of both RESP and corp funds, as i had already started a RESP years ago.

  3. Hi, your post on family trusts for funding education costs was great. I set up a family trust last year to hold a personal business' shares (in hopes of one day multiplying the capital gains deduction). Problem is: now there is accounting and financial statements to do. Could you do a post kind of showing the balance sheet and income statement for a simple family trust that only contains cash and an investment in a private corporation? I am having trouble figuring out how the equity part of the b/s should look and the reporting of the distributions to beneficiaries, net surplus/deficit, showing the dividend income from corporation and the dividend allocation/distribution, etc.

    1. Hi Anon:

      The reality is that many accountants for family trusts such as yours that are not complicated or asset heavy do not prepare financial statements. They just report the income on the T3 trust return,as F/S are not required.