# Incorporating: income trust vs. dividends



## keepathomas (Jul 12, 2012)

Someone I know has decided to incorporate his professional sole proprietorship in order to defer income taxes. After speaking to a few professionals (including a lawyer and a chartered accountant), he has been suggested two different professional corporation setups:

1. income/family (???) trust distribution (recommended by lawyer)
2. dividend distribution (recommended by CA)

The trust one is more expensive to set up (2x more expensive).

What exactly is the difference between the two setups? 
Which one would be more beneficial for tax deferral/reducing taxes?


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## MoneyGal (Apr 24, 2009)

We don't really have enough information to comment. I am assuming the first option is to include a trust for which minor kids are beneficiaries to hold non-voting shares; the second is to make distributions directly through dividends. Which one is "the best" option will depend on many variables specific to your friend's personal situation (age and number of kids, province of residence, etc.) and whatever assumptions they are making about future income, tax rates, etc.


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## keepathomas (Jul 12, 2012)

MoneyGal said:


> We don't really have enough information to comment. I am assuming the first option is to include a trust for which minor kids are beneficiaries to hold non-voting shares; the second is to make distributions directly through dividends. Which one is "the best" option will depend on many variables specific to your friend's personal situation (age and number of kids, province of residence, etc.) and whatever assumptions they are making about future income, tax rates, etc.


As usual, you are completely right 

But what variables would make having a trust more favorable vs. distributions? 

If all things equal, from what I understand, a trust (une fiducie) would provide more flexibility and less headache in the even of unexpected catastrophies (ex: divorce, death of share holder, etc.). For instance, in the event of a death, taxes will be imposed on the shares. In the even of a divorce, you would have to buy back the shares. All these problems can be avoided with a trust?

My understanding is that both are the same, but it costs more to start up a trust because it offers more protection and flexibility in the future...?


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## MoneyGal (Apr 24, 2009)

Well, generally speaking, trusts provide the incorporated professional with more control, as the trustee has discretion over how distributions are made. Trusts also provide more control over income-splitting and some degree of creditor-proofing. 

There is a lot of flexibility in the use of trusts and many creative approaches are possible. Again, generally speaking, trusts provide more flexibility than corps without trusts. Family trusts are probably the most common trusts used in corporate structures.


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