Can a family trust help me split income from my Ontario corporation more tax-efficiently?

A family trust owning shares in your corporation was historically used to distribute dividends to multiple family members, each of whom would pay tax at their own lower marginal rate. This income splitting reduced the family's total tax. The tax on split income rules introduced in 2018 significantly curtailed this strategy for income distributed to family members who do not actively work in the business.

Under TOSI, dividends paid from a family trust to minor children are always subject to the highest marginal rate — no exception. Adult family members who do not meet the active involvement test also face the highest rate. Active spouses and adult children who work at least 20 hours per week can receive income through a trust at their own marginal rates, but the trust must be properly structured and the active involvement must be genuine and documented.

Family trusts still have legitimate uses beyond income splitting — estate planning, protecting assets from creditors, and ensuring a smooth succession of shares using the capital gains exemption for multiple beneficiaries. However, if income splitting was the primary reason a trust was created, review the structure with a tax lawyer to confirm it still works after TOSI.