The short answer
A typical family trust is deemed to sell its capital property at fair market value on its 21st anniversary and every 21 years after, so accrued gains are taxed with no sale and no cash. Distributing property at cost to Canadian-resident beneficiaries before the date is the usual response, but it has conditions and trade-offs.
trustsMost tax is triggered by something you do: you sell, you withdraw, you get paid. The 21-year rule is different. On a family trust's 21st anniversary, the Income Tax Act treats the trust as if it sold its capital property at fair market value and bought it back the same day. Nothing is sold and no cash comes in, but the accrued gain is taxed anyway.
The rule exists because a trust, unlike a person, never dies. Without it, a trust could hold growing assets for generations and defer the gain indefinitely. For many families the rule is now close: a trust set up in 2006 reaches its anniversary in 2027, and many were set up in that era for income splitting, before the 2018 changes to the tax on split income.
This is orientation, not a plan. Implementing these strategies requires your lawyer and accountant, and the right one depends on what the trust holds and who its beneficiaries are.
An ordinary family trust cannot own shares of an Ontario medicine or dentistry professional corporation, as the family trusts guide explains. So for physicians and dentists, this rule matters in other places:
For a typical family trust, the deemed sale happens on the day that is 21 years after the trust was created, and then every 21 years after that. A few kinds of trust run on a different clock: a qualifying spousal or common-law partner trust, an alter ego trust or a joint partner trust generally has its first deemed sale on the death of the spouse or settlor (for a joint partner trust, the later death), and the 21-year cycle runs from that date.
The date cannot be reset by moving the property. When property moves from one trust to another on a tax-deferred basis, the receiving trust takes on the earlier anniversary. A measure announced in the November 2025 federal budget, still before Parliament when this was written, would extend that to property that moves between trusts indirectly.
The first practical step is the least glamorous: find the trust deed, confirm the date the trust was created, and put the anniversary on the calendar of everyone involved.
Take a common pattern. Twenty-one years ago, a business owner froze the value of a company and a family trust subscribed for new common shares for $100. Today those shares are worth $5,000,000, and the trust still owns them.
| Step | Amount |
|---|---|
| Deemed proceeds (fair market value) | $5,000,000 |
| Less the trust's cost | $100 |
| Capital gain | $4,999,900 |
| Taxable half of the gain | $2,499,950 |
| Regular tax on the taxable half at 53.53%, the 2026 Ontario top rate for trusts | about $1,338,223 |
The trust is then treated as having bought the shares back for $5,000,000, so its cost steps up and the same gain is not taxed again on a later sale.
The table is not the whole story. Since 2024, the alternative minimum tax counts the full capital gain rather than half, and a family trust gets none of the basic exemption individuals receive. On this example, and assuming the trust has no other income or credits, the federal minimum tax comes to about $200,000 more than the regular federal tax, and Ontario's minimum tax adds about $76,857 ($49,267 of basic additional tax plus a $27,590 surtax), for a total of about $1,615,076, or $1.62 million, in the year. The extra can be recovered only against regular tax that exceeds the minimum tax in the next seven years, which a trust with little ongoing income may never have. Ask your accountant to project the minimum tax before the date, not after.
Not necessarily. Whether the anniversary is a problem depends on what the trust holds:
The analysis comes first. Assuming the rule must be avoided at all costs can lead to a worse result than paying a modest bill and keeping the trust.
The most common response is to distribute the trust's property to Canadian-resident beneficiaries before the anniversary. The Act generally lets that happen at the trust's cost, so no gain arises now: the beneficiaries take over the cost and are taxed when they later sell or die.
In the example, the trustees could distribute 50 common shares to each of two adult children. Each child would own shares costing $50 and worth $2,500,000, with no tax on the distribution. If the company later qualifies for the lifetime capital gains exemption, each child may be able to claim their own exemption on a sale.
The trade-offs are real. The trust deed must permit the distribution, and the trustees must decide it. The children now own the shares outright, which brings questions of control, creditors and family relationships. If only one child will run the business, the trustees may distribute the shares to that child alone, and the parents may balance the other children's inheritance with other assets or with life insurance paid at death. Disclosure: I am a licensed insurance and investment advisor and life insurance is among the products I place, so have your lawyer and accountant review any equalization plan.
If the parents are not ready to hand common shares to the children, the trust can first exchange its common shares for fixed-value preferred shares worth the current $5,000,000, on a tax-deferred basis. It then distributes those preferred shares to the children at cost, and subscribes for new common shares at a nominal value, so future growth again accrues inside the trust.
The children receive today's value, and the trust keeps its role as the growth vehicle. The trustees can keep control of the company if the voting shares are structured to give it to them, for example by keeping votes with the trust or the parents rather than with the preferred shares distributed to the children. The trust's clock does not restart. The new common shares remain subject to the approaching anniversary, but their accrued gain may be small if the freeze was completed shortly beforehand.
Where the children should not own the shares personally, the trust can distribute them to a holding company that the children own and that is itself a beneficiary of the trust. If control is a concern, the holding company can issue the parent shares with nominal value and many votes each, often called super voting shares, so the parent keeps control while future growth belongs to the next generation.
There is a tax cost to compare. If the holding company later sells the operating company's shares, the gain is the holding company's, and it cannot claim the children's personal lifetime capital gains exemptions. Distributing the shares to the children directly, as in the first response, keeps that option open.
This route touches tax law, corporate law, trust law and succession planning at once, so it needs the lawyer and accountant working from one plan. If the holding company were owned by another trust, the proposed rule on indirect trust-to-trust transfers could also come into play.
Because nothing is sold, the cash has to come from somewhere. Federally, the trust can elect to pay the extra federal tax caused by the deemed disposition in up to 10 equal annual instalments, if it gives the Canada Revenue Agency acceptable security, and interest is charged at the prescribed rate. That spreads the cost; it does not reduce it. Other sources are dividends from a company the trust owns or a sale of trust assets.
Life insurance is not a plan for this date. A death benefit is paid when the insured person dies, and that person may well be alive on the trust's anniversary. The 21-year bill needs its own liquidity plan.
I do not set up trusts or draft deeds; that is legal and accounting work. Where I can help is in seeing the whole picture: what the trust holds, how its value fits the rest of the family's plan, and making sure the anniversary is on the table years before it arrives. For how trusts fit an incorporated professional's plan more broadly, see the family trusts guide; for how capital gains are taxed inside a corporation, see capital gains inside a CCPC. For the wider plan around your corporation, the financial planning for physicians and financial planning for dentists pages explain how I work with each profession.
For a typical family trust, on the day that is 21 years after the trust was created, and every 21 years after that. Qualifying spousal, alter ego and joint partner trusts have their first deemed sale on a death instead. Moving property to a new trust on a tax-deferred basis does not reset the date.
Half of the accrued gain is taxable, and a trust pays the top rate on it, 53.53 percent in Ontario in 2026. A $5 million gain produces about $1.34 million of regular tax, and the alternative minimum tax can add about $277,000 more in that year, assuming the trust has no other income or credits.
Often it can defer it. Property distributed to Canadian-resident beneficiaries before the anniversary generally moves at the trust's cost, so the gain is taxed only when they later sell or die. The trust deed must allow it, the beneficiaries then own the property outright, and some trusts cannot use the rollover at all.
The rollover at cost is generally not available for a distribution to a non-resident beneficiary. Where it is unavailable, the distribution generally triggers a fair market value disposition, which can create the very tax the planning was meant to defer. Some property, such as real estate in Canada held directly by the trust, is treated differently. Check every beneficiary's residence well before the date.
Federally, yes. The trust can elect to pay the extra federal tax caused by the deemed disposition in up to 10 equal annual instalments, if it gives the Canada Revenue Agency acceptable security, and interest is charged at the prescribed rate. It spreads the cost; it does not reduce it.
