My client is 72 and wants to avoid probate. When does an alter ego or joint partner trust make sense, and what does it cost in tax at death?
In 2026, an alter ego trust makes sense when a client aged 65 or older wants property kept out of the estate and the probate saved beats the tax cost: the trust pays a flat 33% federally on gains deemed realized at death, instead of graduated rates. A joint partner trust waits for the later of two deaths.
Which conditions make a trust an alter ego or joint partner trust?
An alter ego trust is one the settlor creates after 1999, at age 65 or older, where the settlor is entitled to all the income that arises before death and no one else can receive or use any income or capital before that death. A joint partner trust has the same age and date tests, but the settlor and spouse or common law partner together get all the income until the later of their deaths laws-lois.justice.gc.ca. The definitions in 248(1) point straight back to those conditions in 104(4)(a)
laws-lois.justice.gc.ca.
| Test | Alter ego trust | Joint partner trust |
|---|---|---|
| Settlor's age when the trust is created | 65 or older | 65 or older |
| Created | After 1999 | After 1999 |
| Who gets all the income while alive | The settlor alone | The settlor and spouse or partner, in combination |
| Who else can touch income or capital | No one, before the settlor dies | No one, before the later death |
| Transfer in | At ACB (or a share of UCC) under 73(1) | At ACB (or a share of UCC) under 73(1) |
| Deemed disposition at fair market value | End of the day the settlor dies | End of the day of the later death |
| Next deemed disposition | 21 years after that death | 21 years after that death |
| ITA reference | 104(4)(a)(iv)(A) | 104(4)(a)(iv)(B), (C) |
| T3 trust type code | 336 | 335 |
The rollover in 73(1) needs the settlor and the trust both resident in Canada at the time of the transfer, and the settlor can elect on their own return to transfer at fair market value instead laws-lois.justice.gc.ca. Subsection 73(1.02) adds that the trust was created after 1999 and the settlor had reached 65 at creation, and for an alter ego trust that it didn't elect out under 104(4)(a)(ii.1) on its first return. The type codes come from the T3 guide
canada.ca.
What happens to the trust when the settlor dies?
The trust is deemed to dispose of its capital property and land inventory at fair market value as the day of the death ends, and to reacquire it at that value laws-lois.justice.gc.ca. It's the same deemed sale the deemed disposition at death page covers for property held personally, except the gain lands on the trust's return instead of the final T1. Half of it is a taxable capital gain under 38(a)
laws-lois.justice.gc.ca. Report it on Form T1055, the summary of deemed dispositions for trusts
canada.ca.
Three rules make the trust pay the tax itself. Subsection 104(13.4) ends the trust's taxation year when the day of death ends, and for an alter ego or joint partner trust the income of that short year is not deemed payable to the deceased. The joint election that moves it to the final T1 is only open to a testamentary spousal trust created by a will of someone who died before 2017 laws-lois.justice.gc.ca. Then 104(6)(b) stops the trust deducting the deemed gains as amounts payable to other beneficiaries in the year of the death. And 122(1) taxes a trust that isn't a graduated rate estate or qualified disability trust at the highest individual percentage
laws-lois.justice.gc.ca, which is 33% for 2026 on income above $258,482
canada.ca. The trust tax rate page has the provincial side.
Two deadlines and reliefs follow from that. The T3 for the year ending on the death is due 90 days after the end of the calendar year in which the death falls, so a death on June 3, 2026 gives a due date of March 31, 2027 canada.ca. Minimum tax doesn't apply to the trust for the taxation year that includes the death
laws-lois.justice.gc.ca, which matches the AMT page.
If the trust carries on after the death, use trust type code 300 on every T3 for a year ending after the date of death canada.ca. It's an inter vivos trust, not the estate, so it never gets graduated rate estate status, and its next deemed disposition is 21 years after the death, as the 21 year rule page sets out.
When does the probate saving beat the tax cost? A worked example
Your Ontario client, 72, settles an alter ego trust in 2026 with a $1,500,000 nonregistered portfolio whose ACB is $900,000, and dies later in 2026 with the values unchanged. Compare the trust with simply holding the portfolio until death. The rest of the estate is worth well over $50,000, so every dollar of the portfolio would attract probate.
| Line | Alter ego trust | Held personally until death |
|---|---|---|
| Fair market value at death | $1,500,000 | $1,500,000 |
| Capital gain ($1,500,000 minus $900,000) | $600,000 | $600,000 |
| Taxable capital gain at one half | $300,000 | $300,000 |
| Federal tax on the gain, no other income on the final return | $99,000 (flat 33%) | $72,976.05 (graduated) |
| Federal tax on the gain, final return already above $258,482 | $99,000 | $99,000 |
| Ontario Estate Administration Tax on the portfolio | $0 | $22,500 |
The graduated figure uses the 2026 federal brackets canada.ca: $8,193.22 on the first $58,523 at 14%, $11,997.01 on the next $58,522 at 20.5%, $16,742.70 on $64,395 at 26%, $22,342.18 on $77,042 at 29%, and $13,700.94 on the last $41,518 at 33%. The EAT is $15 per $1,000 above the first $50,000 of the estate
ontario.ca, so $1,500,000 costs $22,500, as on the Ontario probate fees page.
With little other income, the trust pays $26,023.95 more federal tax to save $22,500 of EAT, so the client ends up $3,523.95 behind before credits and provincial tax. If the final return already sits in the top bracket, for example because a RRIF with no spouse or dependant collapses into it, the gain is taxed at 33% either way and the trust is $22,500 ahead. Run both returns before you recommend the trust, and add the annual T3 compliance cost to the trust column.
Which client facts make an alter ego trust the wrong tool?
Most of the traps sit in other sections of the Act. Check these before the transfer, because undoing a transfer in is rarely clean.
| Client fact | What goes wrong | Provision |
|---|---|---|
| Holds QSBC shares or qualified farm or fishing property with exemption room | The LCGE is only for an individual other than a trust, so the deemed sale in the trust can't use it | 110.6(2), (2.1) |
| Wants to pass assets to the children now | A distribution to anyone but the settlor while the settlor is alive goes out at fair market value | 107(4), 107(2.1) |
| May leave Canada | Property transferred in anticipation of emigrating is deemed disposed of when the client leaves | 104(4)(a.3) |
| Expects a modest final return | The gains lose the graduated rates and are taxed at 33% federally | 122(1), 104(6)(b) |
| Under 65 | No alter ego status; the rollover only works if no one else has any right as a beneficiary | 73(1.02)(b)(ii), 104(4)(a.4) |
| Trust elects out on its first return | Transfers no longer roll in at cost, and the 21 year clock runs from creation | 73(1.02)(c), 104(4)(a)(ii.1) |
The LCGE row is the one that costs most: 110.6(2) and (2.1) both open with "an individual (other than a trust)" laws-lois.justice.gc.ca. Keep shares that qualify for the lifetime capital gains exemption out of the trust, or plan the crystallization first. The distribution row comes from 107(4), which applies 107(2.1) instead of the 107(2) rollout when an alter ego trust distributes to a beneficiary other than the settlor before the death
laws-lois.justice.gc.ca. The emigration and election rows are in 104(4)
laws-lois.justice.gc.ca and 73(1.02)
laws-lois.justice.gc.ca.
Can the trust hold the client's home and keep the exemption?
Yes. For years beginning after 2016, a personal trust can designate a principal residence only if it fits one of a short list, and the first entry is a trust whose 104(4)(a) day turns on a death that hasn't happened yet, with that Canadian resident individual as a specified beneficiary laws-lois.justice.gc.ca. That covers an alter ego or joint partner trust while the settlor, or either partner, is alive.
The trust makes the designation on Form T1079 canada.ca, filed with its T3 for the year of the sale or deemed sale. A personal trust can designate only one property, and the specified beneficiary can't designate another home for the same years
canada.ca. The formula and the one home per family rule are on the principal residence exemption page. In Ontario the house is often the biggest probate saving, because real estate counts toward the estate value less only the mortgage
ontario.ca. Alberta caps its fee at $525, so the saving there is small; see Alberta probate fees.
What does the trust file while the settlor is alive?
A T3 every year. For taxation years ending in 2025, the CRA said all trusts other than bare trusts must file a T3 return including Schedule 15 unless specific conditions are met canada.ca. An alter ego trust is a real trust, not a bare trust, so it files.
Schedule 15 got lighter for these trusts. For taxation years ending on or after December 31, 2025, an alter ego or joint partner trust doesn't report beneficiaries whose only right is to receive income or capital on or after an individual's death canada.ca. The children named to take the capital after the settlor dies are usually exactly those beneficiaries.
The trust can only deduct amounts payable to the settlor while the settlor is alive, or to the settlor or partner for a joint partner trust canada.ca. Income paid or payable to the settlor is deducted under 104(6) and taxed on the settlor's return, so the trust itself usually pays little tax until the death
laws-lois.justice.gc.ca.
Sources
Does a joint partner trust trigger the deemed disposition at the first death?
No. The deemed disposition happens when the day of the later death ends, whether the settlor or the partner dies last laws-lois.justice.gc.ca. Until then, the survivor keeps the right to all the income. A testamentary spousal trust is the version created by will.
Can a client under 65 get the same rollover?
Only in a narrow form. Subsection 73(1.02)(b)(ii) allows the rollover if the transfer doesn't change beneficial ownership and no other person has any absolute or contingent right as a beneficiary, and 104(4)(a.4) then sets the deemed disposition at the client's death laws-lois.justice.gc.ca. Because no remainder beneficiary can be named, that trust can't do the job of a will.
Can the client move assets in at fair market value to use capital losses?
Yes. Section 73(1) lets the individual elect in their return for the year of the transfer that the rollover doesn't apply, so the property goes in at fair market value laws-lois.justice.gc.ca. That realizes the gains or losses on the client's own return, where losses or graduated rates can absorb them.
Does the alter ego trust need a T3 for the year the settlor dies?
Yes, for the short year ending on the day of death, due 90 days after December 31 of that calendar year canada.ca. It reports the deemed gains with Form T1055, and a new taxation year starts the next day
laws-lois.justice.gc.ca.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.