What is a Family Trust?
A family trust is a legal relationship where a settlor transfers property to a trustee to hold and manage for beneficiaries—often children, a spouse, or a family corporation. For tax purposes, a trust is generally treated as an individual taxpayer and files a T3 return unless an exemption applies.
Note: Since tax years ending on or after Dec 31, 2023, most express trusts must provide beneficial ownership information on Schedule 15 with their T3 return (with temporary relief for bare trusts for 2023–2024 unless CRA requests it).
Why Families Use Trusts
1) Asset Protection & Control
Placing investments or private-company shares in a trust helps separate operating risk from family assets and centralizes decision-making with trustees—useful in professional or entrepreneurial families. (Civil and tax treatment varies; please obtain legal advice.)
2) Estate & Succession Planning
Trusts can stage wealth transfers, support education funding, and integrate estate freezes to pass future growth to next-gen owners while the current owner caps their value at today’s fair market value.
3) Tax Planning & Flexibility
Trust rules allow flexibility for income and capital gains to be allocated or designated to beneficiaries (subject to attribution and TOSI), potentially lowering overall family tax and aligning cash flows with needs.
Core Tax Fundamentals (Canada)
Trust as a taxpayer; flow-through mechanics
A trust is deemed an individual for income tax and generally files a T3 return; income payable to beneficiaries can be deducted by the trust and taxed in beneficiaries’ hands. (See ITA s.104 framework).
The 21‑Year Deemed Disposition Rule
Most inter vivos family trusts face a deemed sale and reacquisition of capital property every 21 years, triggering capital gains even without an actual sale (ITA s.104(4)). Planning ahead is essential (e.g., rolling out property, fixing interests, or considering life-interest trust alternatives).
Attribution Rules—avoid unintended tax
Transferring or lending property to a spouse or related minor (including via a trust) can attribute income back to the transferor (ITA s.74.1). Trust terms that allow property to revert, be controlled, or require consent of the contributor can trigger s.75(2) attribution to the settlor. Careful drafting matters.
Tax on Split Income (TOSI)
Dividends or certain gains paid to adult family members from private corporations may be taxed at top marginal rates unless an exclusion (e.g., excluded business, excluded shares, age 65+ spouse) applies (ITA s.120.4 and CRA guidance). Robust documentation of hours, roles, capital, and risk is critical.
Enhanced Trust Reporting (since 2023)
Most express trusts must file Schedule 15 disclosing trustees, settlors, beneficiaries, and protectors. CRA provided administrative relief for bare trusts for 2023–2024 filings unless directly requested; requirements continue thereafter.
Top Tax Benefits of a Well-Structured Family Trust
Trusts can allocate business or investment income to adult beneficiaries to match lower brackets—when attribution and TOSI exclusions are respected and documentation supports contributions or capital.
Where a trust holds Qualified Small Business Corporation (QSBC) shares, multiple family members may access the Lifetime Capital Gains Exemption (LCGE) (ITA s.110.6), subject to QSBC asset-use tests and TOSI/attribution constraints. Recent budgets have increased LCGE limits; ensure the corporation meets 90% active assets at sale and 50% over prior 24 months.
An estate freeze allows the founder to exchange common shares for fixed‑value preferreds and have a family trust subscribe for new common shares—shifting future growth to the trust beneficiaries. Timing and valuation are key; monitor the 21‑year clock.
Using trusts in tandem with Holdco–Opco structures can keep surplus assets away from operating risks; however, inter‑corporate dividend planning must respect section 55 anti‑avoidance “safe income” rules.
Key Risks and Pitfalls to Manage
- 21‑Year Rule “Tax Time Bomb”: Without planning, accrued gains can crystallize at the 21‑year anniversary. Options include roll‑outs, indefeasible vesting, or life‑interest trusts where appropriate.
- Attribution & TOSI Missteps: Gifts/loans to spouses/minors or poorly drafted trust terms can negate planning. Confirm s.74.1/s.75(2) exposure and TOSI exclusions before paying dividends.
- Reporting Penalties: Missing T3/Schedule 15 can trigger penalties and, in gross negligence cases, significant fines; deadlines are generally 90 days after year‑end.
How a CPA-Led Team Designs a Compliant Family Trust Plan
Objectives & Stakeholder Map
Define family goals (education, retirement income, sale readiness), risk tolerance, and beneficiaries (including corporations or charities).
Instrument Drafting & Funding
Draft trust deed to avoid 75(2) triggers where inappropriate; plan funding via FMV transfers or prescribed‑rate loans to mitigate attribution.
Corporate & TOSI Readiness
Establish roles, hours, and capital documentation for beneficiaries in family corporations; evaluate excluded business/excluded shares routes and maintain timesheets and minute books.
21‑Year Strategy
Calendar the disposition date, model tax exposure, and pre‑plan roll‑outs or vesting mechanics years in advance.
Ongoing Compliance
File T3 and Schedule 15 (where required), maintain beneficiary registers, and review annually for QSBC/LCGE eligibility if a sale is contemplated.
Family Trust – FAQs (Canada)
Q1: Are trusts taxed at the top marginal rate?
Most trusts pay top personal rates on income retained in the trust. Income made payable to beneficiaries is typically taxed in their hands (with exceptions).
Q2: Does the 21‑year rule apply to all trusts?
It applies to most inter vivos trusts. Spousal/joint‑partner and alter ego trusts generally defer the deemed disposition until death of the relevant life interest holder.
Q3: Can a family trust multiply LCGE on a business sale?
Potentially, if multiple beneficiaries each hold QSBC‑eligible interests through the trust and TOSI/attribution do not taint the gains—professional structuring is essential.
Q4: What new trust reporting should we expect?
Expect ongoing beneficial ownership disclosure on Schedule 15 and broader filing requirements; CRA provided bare trust relief for 2023–2024, but compliance resumes thereafter.
Ready to structure a compliant, future‑proof family trust?
Book a consultation with Mitesh Patel, CPA to design tax‑efficient trust and estate planning that protects family wealth and avoids pitfalls.
