The 21-Year Rule – A Quick Recap
The 21-year deemed disposition rule means personal trusts are treated as having disposed of capital property every 21 years after their creation—and every 21 years thereafter. The rule prevents trusts from indefinitely deferring capital gains. (budget.canada.ca)
What’s Changing: Anti-Avoidance of 21-Year Rule
- Budget 2025 proposes to broaden the anti-avoidance rule to cover not just direct trust-to-trust transfers, but also indirect transfers of trust property to other trusts, for example via corporations owned by new trusts. (budget.canada.ca)
- This applies to transfers of property that occur on or after "$“Budget Day” — the day the budget was presented. This ensures that newly structured arrangements to diffuse the 21-year expiry won’t escape the rule’s reach. (budget.canada.ca)
Why It Matters for Trusts and Estate Planning
- Anyone using trusts to hold or move assets across generations must understand that wrapping assets in new trusts won’t reset the clock. Deferred gains will catch up.
- This impacts tax planning scenarios involving family trusts, inter-trust loans, or corporate wrappers seeking to avoid the 21-year mark.
Actions to Consider Now
- Review any trust restructurings planned for 2026 to see if they involve indirect trust-to-trust property transfers—these may now trigger earlier deemed dispositions.
- Keep close tracking of trusts' creation dates and property transfers. If a trust is approaching its 21-year anniversary, prepare to pay taxes on accrued gains unless property is transferred under safe exemptions.
- Consult a professional before setting up new trust structures that push or reset ownership, as these may be targeted by this expanded rule.
Example Scenario
- Family Trust A is created in 2005. In 2026, the trustee moves property to Family Trust B, indirectly, via a family corporation. Although transfer was indirect, under the proposed rule, the new arrangement won’t defeat the 21-year rule: A is deemed to have disposed of the property at its 21-year point.
- If the trust owner expected to avoid gain taxation by “splitting” into multiple trusts, that strategy may no longer work.
Bottom line: If you're setting up or managing trusts, the proposed expansion of the anti-avoidance rule means past loopholes using interposed entities may be plugged. Planning needs to be more transparent and conservative regarding timing and ownership structure.
Category: Entity Setup
TaxHome: Canada
Author: NomadicTax Research Team
ReadTime: 5-8 min
Published: true