What is the 21-year deemed disposition rule for a family trust and why does it matter?

Most trusts in Canada, including a typical family trust, are treated under the Income Tax Act as if they sold and immediately reacquired all of their capital property every 21 years, whether or not anything is actually sold. This "deemed disposition" triggers tax on any accrued capital gain inside the trust at that 21-year mark, even though no cash actually changes hands. The clock generally starts running from the date the trust was created, so a family trust set up decades ago may be approaching, or have already passed, its first 21-year anniversary.

The rule exists to stop families from using a trust to defer capital gains tax indefinitely by never selling the underlying assets — cottages, investment portfolios, or private company shares — and passing enjoyment of them down through generations inside the same trust. Because the tax bill falls on the trust itself and can be significant if the property has grown a lot in value, trustees need to plan well before the anniversary: distributing property to beneficiaries earlier, or arranging liquidity to pay the resulting tax. Waiting until the year the rule applies leaves few good options.