- - An alter ego trust is a trust you create for yourself during your lifetime, generally available once you meet a minimum age set out in the federal Income Tax Act.
- Most people set these trusts up primarily to keep assets out of the probate process, not to reduce income tax during their lifetime.
- Under longstanding federal tax rules, capital property held in an alter ego trust is generally treated as disposed of at fair market value on the death of the person who created it —…
If you're over 65 and have set up — or are considering — an alter ego trust or a joint partner trust as part of your Ontario estate plan, you've probably heard these structures can help keep assets out of probate. What gets less attention is what happens tax-wise the moment the person who created the trust (or, for a joint partner trust, the survivor of the couple) dies.
The short answer: the trust itself, not your personal estate, is generally the one that ends up reporting and paying tax on any built-up gain in the trust's assets at that point. Understanding why — and what that means in practice — helps you plan around these trusts realistically instead of assuming they make tax disappear.
What These Two Trusts Actually Are
- An alter ego trust is a trust you create for yourself during your lifetime, generally available once you meet a minimum age set out in the federal Income Tax Act. You're entitled to receive all of the trust's income while you're alive, and no one else may receive or use its income or capital before your death.
- A joint partner trust works the same way but for a couple: you and your spouse or common-law partner together are entitled to all of the trust's income, and no one else may benefit from it while either of you is alive.
- Both are "inter vivos" (living) trusts — set up and funded while you're alive — and both are commonly used to hold assets like a house, investment accounts, or a business interest.
Why People Use Them: Probate, Not Ongoing Tax Savings, Is the Usual Draw
Most people set these trusts up primarily to keep assets out of the probate process, not to reduce income tax during their lifetime. Property that's properly transferred into and held by an alter ego or joint partner trust generally isn't part of your probate estate when you die, which means it typically isn't included in the value used to calculate Ontario's Estate Administration Tax, and your estate trustee doesn't need a Certificate of Appointment of Estate Trustee to deal with it. A related benefit is privacy — a trust's terms don't become part of the public record the way a probated will can.
What Happens to the Trust's Assets When You Die
This is where these trusts differ sharply from simply owning property yourself. Under longstanding federal tax rules, capital property held in an alter ego trust is generally treated as disposed of at fair market value on the death of the person who created it — echoing the same deemed-disposition-at-death rule that applies to property you own personally. For a joint partner trust, that deemed disposition is generally deferred until the death of the second spouse or partner.
That deemed disposition can trigger a capital gain inside the trust, even though nothing was actually sold to anyone. Generally, it's the trust — using its own tax return for the year that includes the death — that reports and is liable for the resulting tax, not the deceased's personal terminal return.
Rollover Going In, Tax Reckoning Coming Out
Property transferred into a qualifying alter ego or joint partner trust while you're alive can generally move in at your original cost rather than triggering an immediate gain on the transfer itself. That's exactly why these trusts don't let anyone escape tax on the built-up growth altogether — the reckoning is generally deferred to the specified death, not eliminated.
Alter Ego vs. Joint Partner Trust, Side by Side
| Alter Ego Trust | Joint Partner Trust | |
|---|---|---|
| Who can create it | An individual who meets the age requirement | A couple who together meet the age requirement |
| Who receives income during life | Only the person who set it up | Only the settlor and their spouse or partner, together |
| When deemed disposition generally occurs | On the settlor's death | On the death of the second spouse or partner |
| Main non-tax benefit | Avoids probate on trust assets; keeps terms private | Same benefit, for a couple's combined assets |
Frequently asked questions
Does using an alter ego trust mean my estate avoids capital gains tax altogether?
No. It generally shifts when the gain is recognized and who reports it, moving the liability to the trust rather than your personal estate — but it doesn't make the underlying growth in your assets tax-free.
Do I still need a will if I have an alter ego trust?
Almost always, yes. These trusts typically hold only the specific assets you transferred into them. Anything left outside the trust still passes through your estate and is governed by your will, or by intestacy rules if you don't have one.
Is this kind of trust worth setting up for everyone over 65?
Not necessarily. These trusts add ongoing complexity, trustee obligations, and professional costs, and they tend to make the most sense for larger or more complex estates where avoiding probate is genuinely significant. A lawyer can help you weigh that against a simpler will-based plan.
Who files the tax return when the deemed disposition happens?
Generally, the trustee is responsible for filing the trust's own tax return reporting the deemed disposition, separately from the deceased's personal terminal return.
This is a wills & estates question
Start a file online — flat, published fees, reviewed by a licensed Ontario lawyer before a dollar is owed.