A family trust is a legal arrangement where trustees hold assets, most often shares of a family business, for the benefit of family members. Since the 2018 TOSI rules, it’s no longer a simple way to split income with family. Its main uses today are multiplying the $1.25 million lifetime capital gains exemption when you sell your business, estate freezes, probate and creditor planning, and keeping control while passing on future growth. Set-up usually costs $3,000 to $10,000+, plus a T3 return every year. Assets are deemed sold every 21 years.
On this page
- What Is a Family Trust and When Is It Worth It?
- How a Family Trust Works: Settlor, Trustees and Beneficiaries
- Tax Benefits That Still Work After TOSI
- How Family Trusts Are Taxed: Top Rate, Allocations and T3 Filing
- The 21-Year Rule and How to Plan for It
- What It Costs to Set Up and Run a Family Trust
- FAQ: Family Trusts in Canada
- Plan a Family Trust Alongside Your Corporation
What Is a Family Trust and When Is It Worth It?
A trust isn’t a company or a bank account. It’s a relationship: one person transfers property to trustees, who manage it for beneficiaries according to a trust deed.
A family trust usually makes sense if:
- You own a growing private corporation and might sell it one day
- You want future growth to go to your kids without giving them control
- You’re doing an estate freeze
- You want some protection from creditors or family law claims
- You want to reduce probate fees on certain assets
It’s usually not worth it if:
- Your business is small and you don’t expect to sell it for a large gain
- Your only goal is splitting dividends with your spouse and kids (TOSI shuts most of that down)
- You can’t justify the yearly T3 filing and professional fees
How a Family Trust Works: Settlor, Trustees and Beneficiaries
| Role | Who | What they do |
| Settlor | Usually a relative who is not a beneficiary (often a grandparent) | Settles the trust with a small asset, like a coin or a $20 bill |
| Trustees | Usually the parents, sometimes with an independent person | Hold legal title, make decisions, file the T3, follow the trust deed |
| Beneficiaries | Spouse, children, grandchildren, sometimes a family holding company | Receive income or capital at the trustees’ discretion |
The typical business setup:
- A settlor creates the trust with a gold coin.
- The trust borrows a small amount at the prescribed rate and buys new common shares of the family company, often right after an estate freeze.
- Future growth in the company’s value now belongs to the trust (and the family members behind it), not just the parents.
Most family trusts are discretionary: the trustees decide each year who gets what.
Tax Benefits That Still Work After TOSI
The tax on split income (TOSI) rules introduced in 2018 tax most dividends paid to family members at the top rate, unless an exception applies. Here’s what still works:
| Benefit | Still works? | How |
| Multiplying the LCGE | ✅ Yes, the biggest benefit | When the business sells, each beneficiary can use their own $1.25M exemption on qualified small business corporation shares. Capital gains on these shares are generally excluded from TOSI. |
| Dividends to adult beneficiaries (18+) who work in the business | ✅ Sometimes | If they actively work in the business on average at least 20 hours a week during the year, or did so in any five prior years (the “excluded business” exception) |
| Dividends to spouse when owner is 65+ | ✅ Yes | Same treatment as pension splitting |
| Dividends to kids under 18 or adult kids not in the business | ❌ Mostly no | Taxed at the top rate under TOSI |
| Estate freeze and probate planning | ✅ Yes | Future growth sits in the trust, not your estate |
| Creditor and family law protection | ✅ Often | Assets held in a properly drafted discretionary trust are harder to reach |
See also: TOSI rules in Canada · LCGE guide
How Family Trusts Are Taxed: Top Rate, Allocations and T3 Filing
- Income kept in the trust is taxed at the top personal rate (about 53.5% in BC and 48% in Alberta at the top bracket). That’s why most trusts pay out or allocate income every year.
- Income allocated to beneficiaries is deducted by the trust and taxed in the beneficiary’s hands, subject to TOSI and the attribution rules.
- Capital gains allocated to beneficiaries keep their character, so the LCGE can be claimed by each beneficiary.
- T3 return: due 90 days after the trust’s year-end. Trusts have a December 31 year-end, so that’s generally March 31. Most trusts also have to file Schedule 15 listing the settlor, trustees and beneficiaries.
| Filing | Deadline |
| T3 return and Schedule 15 | 90 days after December 31 (usually March 31) |
| T3 slips to beneficiaries | Same deadline |
| Payment of trust tax | Same deadline |
Related: T3 trust returns and bare trust reporting
The 21-Year Rule and How to Plan for It
Every 21 years, a family trust is deemed to sell all its capital property at fair market value. Any growth becomes a taxable capital gain in the trust, taxed at the top rate, even though nothing was actually sold.
Example: A trust set up in 2006 bought company shares for $100. In 2027 (its 21st anniversary) the shares are worth $4 million. Without planning, the trust has a ~$4 million capital gain and a tax bill in the high hundreds of thousands, with no cash to pay it.
Your options before the 21st anniversary:
- Distribute the assets to Canadian-resident beneficiaries. They generally roll out at the trust’s cost, deferring the gain until the beneficiary sells.
- Sell or redeem the shares and use the LCGE.
- Do a reorganization or “freeze” inside the trust so less growth sits there.
- Pay the tax if the gain is small.
Plan at least 2 to 3 years before the anniversary. Last-minute 21-year planning is expensive and limits your options.
What It Costs to Set Up and Run a Family Trust
| Cost | Typical range |
| Trust deed and legal setup | $3,000 to $10,000+ |
| Business valuation (if paired with an estate freeze) | $3,000 to $15,000+ |
| Annual T3 return and slips | $1,500 to $3,000 |
| Trustee meetings, resolutions and minutes | Varies |
| 21-year planning | $3,000 to $10,000+ |
The trust only pays off if the tax saved, mainly from LCGE multiplication or freeze savings, is clearly bigger than these costs.
FAQ: Family Trusts in Canada
Can I be the settlor and a beneficiary?
You shouldn’t be. If the settlor can benefit, the attribution rules can send all the trust’s income and gains back to the settlor. Use an unrelated or non-beneficiary settlor.
Can a family trust own my house?
It can, but the trust can only claim the principal residence exemption in limited cases. Usually not recommended.
Do I need a lawyer and an accountant?
Yes. The lawyer drafts the trust deed. The accountant handles the tax structure, valuation coordination and annual T3 filings.
What’s the difference between a family trust and a bare trust?
In a bare trust, the trustee just holds title and has no real decision-making power, like a parent on title to a child’s condo. A family trust gives trustees real discretion. Their filing rules differ.
Does a family trust avoid probate?
Assets owned by the trust aren’t part of your estate, so they generally aren’t subject to probate fees. See probate fees in BC.
Can a non-resident be a beneficiary?
Yes, but distributions to non-residents have withholding tax and lose the tax-free rollover. Plan carefully.
Plan a Family Trust Alongside Your Corporation
