What is an alter ego trust and who can use one in Ontario?

An alter ego trust is a special type of living trust available in Canada to individuals who are 65 or older. You transfer assets into the trust during your lifetime, name yourself as the sole beneficiary while you are alive, and designate who receives the assets after your death. The key advantage is that the transfer into the trust does not trigger immediate capital gains tax — that tax is deferred until your death.

Because assets held in an alter ego trust do not form part of your estate, they can pass to your chosen beneficiaries without going through the estate administration process and without being subject to estate administration tax (commonly called probate fees) in Ontario. This can be significant for larger estates.

The trade-off is that any accrued capital gain on the trust assets is recognized at the time of your death, which is the same tax treatment a directly held asset would receive. The main benefit is privacy and probate savings, not capital gains elimination.

Alter ego trusts must meet specific requirements under the federal Income Tax Act and are more complex and costly to set up than a simple will. They work best for people over 65 with significant assets, particularly those with real property or investments carrying large accrued gains. A lawyer and accountant should work together on the structure.