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Family trusts
A family trust is administered by a calendar. A fixed December year end, a return due in March, distributions that must be documented before the year closes, and a deemed disposition arriving twenty-one years after it was settled whether anyone has prepared for it or not.
The short version
Unlike a corporation, a family trust cannot choose a year end that suits it. The year ends 31 December, always, and the return follows 90 days later.
That timing is worth noticing. The trust's return is due at the end of March, the beneficiaries need their slips in order to file their own returns by 30 April, and the information those slips carry depends on decisions that had to be made and recorded three months earlier. A trust left until March is a trust where the decisions have already been made by default.
Trust reporting was expanded, and the substantial change for ordinary family trusts is Schedule 15, which reports beneficial ownership. It requires, for every trustee, settlor and beneficiary, and for anyone able to exert influence over trustee decisions:
Two practical consequences. Collecting identification numbers from a wide beneficiary class, which in many family trusts includes children, grandchildren and spouses, takes longer than anyone allows for. And trust deeds are frequently drafted with broad beneficiary classes, so establishing who actually has to be reported is a question for the deed rather than for a list someone remembers.
Income retained in a trust is taxed at the top marginal rate from the first dollar. There are no graduated brackets to work through. That is deliberate, and it is why family trusts almost always push income out to beneficiaries, who are then taxed at their own rates.
The mechanism is that income paid or made payable to a beneficiary in the year is deducted by the trust and included by the beneficiary. Made payable is the important half: the cash does not have to move, but the entitlement has to be real and it has to exist by the year end.
The most common problem on a trust file. Trustee resolutions signed in February, or March, allocating income for a year that closed on 31 December.
The decision to make income payable has to have been made within the year, and the documentation has to reflect that. A resolution dated after the year end recording a decision that was allegedly made before it is a weak position, and it is the first thing anyone reviewing the file will look at.
Put it in the calendar for December alongside the corporate year end work, not for March alongside the filing.
A distribution that exists only as a journal entry is the weakest thing on a trust file, and it is common.
Three things make a distribution real rather than notional:
The underlying test is whether an outsider reading the records would conclude the beneficiary genuinely became entitled to money. Resolutions alone do not answer that. Bank statements do.
Deeds are drafted in two broad ways, and the difference decides whether your trust has quietly gone out of date.
Some name individuals. Others define a class, such as the children and remoter issue of the settlor. A class generally picks up children born after the trust was settled without anything needing to be done. A named list does not, so a child born after the deed was signed may simply not be a beneficiary, whatever the family assumes.
That matters in both directions. It affects who can receive a distribution, who counts when a capital gain is allocated on a sale, and who has to be reported on Schedule 15. It is also not something to fix casually: whether beneficiaries can be added depends on the deed, and doing it the wrong way can have consequences of its own. That is a conversation with the lawyer who drafted it.
The practical step is to read the beneficiary clause against the current family, rather than working from what everyone remembers being intended.
Family trusts were widely used to spread dividend income among adult family members in lower brackets. The rules on split income substantially closed that, and the detail that matters is easy to miss.
One of the main exclusions from those rules requires an individual to hold shares directly, meeting votes and value thresholds. Shares held through a trust generally do not satisfy it, because the individual does not own them. So an arrangement that was efficient when it was set up may now produce dividends taxed at the top rate in the hands of a beneficiary with very little other income.
Trusts established before those rules changed are worth reviewing rather than continuing on autopilot. Some still do useful work. Others are now an annual filing obligation delivering nothing.
On the 21st anniversary of a trust being settled, and every 21 years after, the trust is treated as having disposed of its capital property at fair market value and immediately reacquired it. Tax is payable on the resulting gain even though nothing has been sold and no money has come in.
The rule exists to stop property being held indefinitely without a generational tax event. It is not a penalty and it is not avoidable by inaction. It simply arrives.
The exposure is obvious once stated: a trust holding shares of a company that has grown substantially over two decades faces a tax bill measured against that growth, with no sale to fund it.
The usual answer is to distribute the property to Canadian-resident beneficiaries before the anniversary, which can generally be done on a rollover basis so that no gain is triggered and the beneficiary takes on the trust's cost base. The deferral continues in the beneficiary's hands.
That sounds simple and is not, because it requires:
Some trusts have alternative arrangements, including spousal trusts where the deemed disposition falls on the death of the spouse instead. Which applies depends on how the trust was drafted.
Know the date. Every trust has a 21st anniversary and it is fixed from the day it was settled. Trusts created through the 2000s are reaching it now.
Two years of notice is comfortable. Two months is not, because a valuation takes time, a deed may need review, and the family conversation about who gets what is rarely brief.
The most valuable thing a family trust does for an owner-managed business is on an eventual sale of the company.
Where the trust holds shares of the operating company and a sale occurs, the capital gain can be allocated among several beneficiaries, each of whom may be able to apply their own lifetime capital gains exemption against their share. With several family members, the sheltered amount can be a multiple of what one person could achieve alone. This is a mainstream, long-established piece of planning rather than anything exotic.
It has conditions, and they are conditions you meet in advance or not at all:
The recurring failure is timing. This is planning that wants two or three years, and it is frequently raised when an offer is already in hand, by which point the useful options have closed.
A family trust has a 31 December year end, with no ability to choose otherwise, and the T3 return is due 90 days later at the end of March. Slips to beneficiaries are due at the same time, which matters because beneficiaries need them to file their own returns by 30 April.
On the 21st anniversary of the trust being settled, and every 21 years afterwards, the trust is deemed to have disposed of its capital property at fair market value and immediately reacquired it. Tax is payable on the resulting gain even though nothing has been sold. The usual response is to distribute property to Canadian-resident beneficiaries beforehand, generally on a rollover basis, which requires planning well in advance.
No, and this is the most common problem on trust files. Income must be paid or made payable within the year, so the decision has to have been made before 31 December and the documentation must reflect that. A resolution dated in February recording a decision supposedly made in December is a weak position and is the first thing a reviewer examines.
In practice yes. A trust with no account of its own has nothing to distribute from, and every transaction becomes an argument about whose money it was. Where amounts are made payable but not paid, they become a real debt of the trust to the beneficiary and should be recorded and eventually settled rather than accumulating unmentioned for years. For a minor beneficiary, funds should land somewhere for that child rather than being absorbed into household spending.
It depends on how the deed was drafted. A deed defining a class, such as the children and remoter issue of the settlor, generally picks up children born later automatically. A deed naming individuals generally does not, so a child born after signing may not be a beneficiary regardless of what the family assumes. It affects distributions, allocation of a gain on a sale, and Schedule 15 reporting. Whether beneficiaries can be added depends on the deed and is a question for the lawyer who prepared it.
Worth establishing rather than assuming. The rules on split income substantially closed the dividend-splitting use that many trusts were set up for, partly because a key exclusion requires shares to be held directly rather than through a trust. Trusts can still be very valuable on a sale, for multiplying the capital gains exemption, and for succession. Some, though, are now an annual filing obligation delivering nothing.
Where a trust holds shares of the operating company, a capital gain on a sale can be allocated among several beneficiaries, each potentially applying their own lifetime capital gains exemption. The shares must qualify, one of the tests looking back 24 months, and the trust must have been properly constituted and administered with the gain allocated and designated correctly. It is planning that needs years rather than weeks.
This page describes general principles as at August 2026 and is not advice for your situation. What a particular trust can and cannot do depends on its deed, which is a legal document, and several of the areas above have technical conditions beyond what is set out here. Trust planning is generally done alongside a lawyer.
If the answer is not immediate, that is the thing worth establishing first. Twenty minutes, no charge.
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