How Are Trusts Taxed in British Columbia? T3, 21-Year Rule

If you are a trustee, or a beneficiary of a trust or an estate, you may be surprised to learn that the trust is treated as its own taxpayer. It reports income, pays tax on what it keeps, and files its own return. That is a different set of rules from your personal tax return.

This article explains the main federal tax ideas that apply to trusts in British Columbia: the T3 return, the kinds of trusts the Canada Revenue Agency (CRA) distinguishes, the 21-year rule and bare trusts. Tax rates and how income is passed to beneficiaries depend on the facts, so those points are best confirmed with an accountant.

This article covers the law of British Columbia.

The T3 return and its deadline

A trust reports its income on a T3 return. The return must be filed no later than 90 days after the trust's tax year-end. For a trust with a December 31 year-end, that is March 31.

Any balance owing should be paid within the same 90 days, so the filing deadline is also the payment deadline.

The return also asks for information about the trust's reportable entities, which is part of Schedule 15 and the beneficial ownership information. Leaving out the specified information may result in a late-filing penalty.

Testamentary and inter vivos trusts

The type of trust matters because the tax rules differ. A testamentary trust is generally created on and as a result of an individual's death. An inter vivos trust is any trust that is not testamentary.

An estate itself is often the first trust you meet. An estate can qualify as a graduated rate estate (GRE), but only for up to 36 months after death. It must designate itself as the GRE on its first T3 return for a tax year ending after 2015 and give the deceased's SIN. After 36 months it stops being a GRE.

If an estate is likely to stay open for a long time, the 36-month limit is worth planning around with an accountant. What the tax rates are for each kind of trust, and how they compare, is something to confirm with an accountant for the year in question.

The 21-year rule

A trust can outlive any one person, so the Income Tax Act has a rule to prevent gains from being deferred forever. Every trust is deemed to dispose of most of its capital property at fair market value on the day 21 years after the latest of January 1, 1972, the trust's creation day and certain other determined days.

In plain terms, the trust is treated as if it sold the property, even if nothing was actually sold. Tax may be owing on the accrued gain, so a trustee of a long-lived trust should look ahead before the anniversary arrives.

There are exceptions. For alter ego and joint partner trusts, the deemed disposition day is a death rather than the 21-year anniversary. For an alter ego trust it is the death of the settlor. For a joint partner trust it is the later death of the settlor and their spouse or common-law partner. Tax on accrued gains is therefore deferred to that death. Rollover transfers between certain trusts, including between alter ego trusts and between joint spousal or common-law partner trusts, also carve out exceptions to the receiving trust's deemed disposition timing.

Alter ego and joint partner trusts

These two trusts are the usual exceptions to the 21-year rule, and each has strict conditions. The table summarizes them.

A trust is not treated as an alter ego trust if it elects so on its T3 return for its first tax year. Because these choices are made on the first return, the decision is best made with an accountant before filing.

Bare trusts and what to do next

A bare trust is a simple arrangement where someone holds legal title for another. The Income Tax Act does not define it. Under section 104(1), an arrangement may be treated as not a trust where the trustee acts as agent for all beneficiaries. A trustee generally qualifies as agent when it has no significant powers, acts only on the beneficiaries' instructions and only holds legal title.

For 2025 year-ends, the CRA does not expect bare trusts to file a T3 return with Schedule 15. Certain bare trusts may have to file for taxation years ending in 2026 and later, based on proposed Bill C-15 legislation. Check the current position before relying on this.

• Confirm the trust's type and its year-end.
• Mark the T3 filing and payment date, 90 days after year-end.
• If the trust is an estate, note the 36-month GRE limit and designate it on the first return.
• Check whether the 21-year anniversary, or a death for an alter ego or joint partner trust, is approaching.
• Ask an accountant how income should be taxed in the trust or by beneficiaries, and which rates apply.
• Ask a lawyer if the trust document is unclear or beneficiaries disagree.

Frequently asked questions