Strategic Wealth Protection Partners
By Ron Cooke
August 14th, 2025
In Canada, most trusts are taxed as separate legal entities and must file their own T3 tax return each year.
Trust income that’s not paid out to beneficiaries is taxed at the highest marginal tax rate, making it important to distribute income when possible. If the trust distributes income to beneficiaries, that income is generally taxed in the beneficiaries’ hands instead. There’s also the 21-year deemed disposition rule, which can trigger capital gains tax even if nothing is sold. Special trusts like alter ego trusts or graduated rate estates may have different tax treatments.
Key Takeaways
- Trusts are separate legal entities taxed under strict rules in the Income Tax Act
- Most trusts must now disclose beneficial ownership to CRA
- Income can be taxed in the trust or in the hands of beneficiaries
- The 21-year rule can trigger tax on unrealized capital gains
Trusts must be carefully administered to stay compliant and achieve their intended tax and estate planning goals. Always document distributions and keep accurate financial statements. Don’t overlook attribution rules or the impact of the 21-year rule on long-term planning. Trustees must file on time and report all required beneficial ownership information.
