- A family trust set up during your life is generally an inter vivos (living) trust for tax purposes.
- A trust's taxable income is generally taxed at the highest individual rate, and most trusts face a deemed disposition of capital property every 21 years.
- Income splitting limits and the tax on children's dividends turn on the facts, so confirm them with an accountant before you sign anything.
A family trust is often raised when a business is growing. The idea is that the trust holds shares for the benefit of family members, instead of you holding them personally. Whether it is worth the cost and the ongoing work depends on your business and your family.
This article explains what a family trust is, how it is taxed in general, and what a trust must file and do each year. It does not replace advice from an accountant and a lawyer who can look at your numbers and your goals.
What a family trust is and how it holds shares
A trust is an arrangement where trustees hold property for the benefit of others, who are called beneficiaries. In a family trust used for a business, the trust may own shares of your company, and family members are the beneficiaries. The trust document sets out who the trustees are, who can benefit and how the trustees make decisions.
For tax purposes, a testamentary trust is generally created on and because of a person's death. Any trust that is not a testamentary trust is an inter vivos (living) trust. A family trust you create while you are alive is therefore a living trust.
How a trust is taxed
Under the Income Tax Act, a trust's taxable income is generally taxed at the highest individual rate. Graduated rate estates and qualified disability trusts are excluded from that rule. Those exceptions are for estates and certain trusts arising on a death, so they do not usually describe a family trust you set up in your lifetime.
A trust is also generally deemed to dispose of its capital property at fair market value every 21 years. This matters if the trust holds growing shares, because it can create a tax bill even though nothing was sold. Spousal, alter ego and joint partner trusts are treated differently: the first deemed disposition happens when the beneficiary spouse dies, or on the later of the two deaths, rather than on the usual 21-year date.
An alter ego trust is a living trust created after 1999 by a settlor who was 65 or older, and the settlor must be entitled to all of the trust's income during their lifetime. A joint spousal or common-law partner trust has a similar age test and requires the settlor and their spouse or partner to be entitled to all the income until the later of their deaths.
Income splitting and children's dividends
Many owners ask about spreading income among family members, including children. This is a part of tax law with specific limits, and the result can depend on who the beneficiary is, what role they play in the business and how the trust is written. Because the outcome turns on those facts, get a written opinion from an accountant before you rely on any expected tax saving.
Ask the accountant to model the actual tax with the trust and without it, including the cost of setting it up and filing for it every year. A trust that saves little tax may still be worth it for other reasons, such as control over who benefits. It may also not be worth it at all.
Filing and trustee duties after the trust is set up
A trust that is a Canadian-resident express trust and is not a listed trust must file a T3 return. Other trusts file only if they meet conditions, such as having tax payable or being asked to file. Some trusts count as listed trusts and may not have to file, but which trusts qualify for your trust's tax year depends on your situation, so it is worth confirming with a lawyer.
| Item | What the rules say |
|---|---|
| T3 due date | No later than 90 days after the trust's tax year-end |
| Beneficial ownership | A trust that must file a T3 generally also reports on Schedule 15 |
| Late return with tax owing | 5% of the unpaid tax plus 1% for each full month late, up to 12 months |
| Late return, no tax owing | $25 a day, minimum $100, maximum $2,500 |
| Gross negligence or false statements | The greater of $2,500 and 5% of the highest fair market value of the trust's property, for a non-listed trust |
Trustees also have legal duties. In investing trust property, an Ontario trustee must use the care, skill, diligence and judgment of a prudent investor. If you plan to be a trustee of your own family trust, you should understand these duties first.
What to do next
- Write down your goals: who should benefit, who should control the shares and what happens if you die or become incapable.
- Ask your accountant for a comparison of your tax with and without a trust, including yearly filing costs.
- Ask a lawyer how the trust deed should name trustees and a replacement if a trustee dies or cannot act.
- Find out who will prepare the T3 return and the Schedule 15 information each year.
- Keep clear records of trust decisions and payments.
If a trustee later needs guidance on managing trust property, they may apply to the Superior Court of Justice for the court's opinion, advice or direction without starting an action.
Frequently asked questions
Is a family trust the same as a testamentary trust?
No. A testamentary trust is generally created on and because of a person's death, and any trust that is not testamentary is an inter vivos (living) trust. A family trust you create while you are alive is a living trust.
Does a family trust avoid tax on growth in the shares?
Not necessarily. A trust is generally deemed to dispose of its capital property at fair market value every 21 years. Spousal, alter ego and joint partner trusts follow a different first date.
Does a family trust have to file a tax return?
Often yes. A Canadian-resident express trust that is not a listed trust must file a T3 return, and the return is due no later than 90 days after the trust's tax year-end. Some listed trusts are generally exempt, so check your situation.
Can a trustee be replaced?
Yes. A new trustee may be appointed in writing where a trustee dies, stays out of Ontario for more than 12 months, refuses or is unfit to act, or is incapable of acting. The Superior Court of Justice can also appoint a new trustee.
Sources
- Canada Revenue Agency – Trust types and codes — canada.ca
- Income Tax Act, s. 122 (Justice Laws) — Justice Laws (federal)
- Income Tax Act, s. 104 (Justice Laws) — Justice Laws (federal)
- Trustee Act, R.S.O. 1990, c. T.23 (e-Laws) — Ontario e-Laws
- CRA – T3 Trust Guide (T4013) — canada.ca
- CRA – Important updates to the trust reporting requirements for the 2025 taxation year — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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