What is the 21-year rule for trusts in Ontario, and what happens at the deemed disposition?
The 21-year rule means a trust is generally treated as selling its capital property at fair market value every 21 years, even if nothing is actually sold. How this applies depends on the trust, so it is worth confirming with a lawyer or accountant.
Separately, a trust's taxable income is generally taxed at the top personal rate. Graduated rate estates and qualified disability trusts are excluded from that rule. A graduated rate estate can only last up to 36 months after the death. A testamentary trust is generally created on and because of a death, while an inter vivos (living) trust is any other trust.
Spousal, alter ego and joint partner trusts work differently: the first deemed disposition happens at the beneficiary's death, or at the later of the two deaths for a joint partner trust. Alter ego and joint partner trusts are living trusts created after 1999 by a settlor aged 65 or older. A trust generally must file a T3 return if it is a Canadian-resident express trust that is not a listed trust. A trustee can ask the Superior Court of Justice for advice or direction on managing trust property. Tax rates change every year, so confirm current figures with an accountant.
Key takeaways
- A trust is generally treated as selling its capital property at fair market value every 21 years, even without an actual sale.
- A trust's taxable income is generally taxed at the top personal rate, but graduated rate estates and qualified disability trusts are excluded, and a qualified disability trust must be a testamentary trust that arose on a death with a joint election on Form T3QDT.
- For spousal, alter ego and joint partner trusts, the first deemed disposition happens at the beneficiary's death, or at the later of the two deaths for a joint partner trust, rather than at 21 years.
- A trustee may apply to the Superior Court of Justice, without starting an action, for the court's opinion, advice or direction on managing trust property.