How is a family trust taxed in Canada, and when does allocating income to the kids actually save tax?
For 2026, a family trust pays federal tax at 33%, the top individual rate, on every dollar of income it keeps, with no basic personal amount. Income paid or payable to a beneficiary by year end is deducted by the trust and taxed to the beneficiary instead, but TOSI and the attribution rules decide whose rate really applies.
Who pays the tax on family trust income?
The trust is taxed as an individual under 104(2), but not at graduated rates laws-lois.justice.gc.ca. Subsection 122(1) taxes a trust other than a graduated rate estate or qualified disability trust at the highest individual percentage on all of its taxable income
laws-lois.justice.gc.ca, and for 2026 that rate is 33%
canada.ca. Provincial tax comes on top. The rest of this page follows the money out of the trust.
| Income or gain | Kept in the trust | Paid or payable to a beneficiary | Provision |
|---|---|---|---|
| Interest, rent, other income | 33% federal from the first dollar | Taxed to the beneficiary; the trust deducts it | 104(6), 104(13) |
| Taxable dividends from Canadian corporations | 33% on the grossed up amount, less the dividend tax credit | Keeps its dividend character if the trust designates it | 104(19) |
| Capital gains | One half taxable at 33%, and minimum tax with no exemption | Keeps its capital gain character if designated | 38(a), 104(21), 127.51 |
| Gains on qualified small business corporation shares | No exemption for the trust | Beneficiary can claim the capital gains deduction | 104(21.2) |
| Nontaxable dividends (capital dividends) | Not taxed | Must be designated to the beneficiary | 104(20) |
| Any amount from a private company paid to a family member | Not applicable | Often taxed at 33% under TOSI | 120.4 |
The deduction only works if the amount became payable in the year. Subsection 104(24) deems an amount not payable unless it was paid in the year or the beneficiary was entitled in the year to enforce payment laws-lois.justice.gc.ca. A trustee resolution dated January 15 is too late for the prior year, whatever the books say.
The trust also loses most personal credits. Subsection 122(1.1) allows a trust taxed under 122(1) only the donation credit, the minimum tax carryover and the dividend tax credit laws-lois.justice.gc.ca, so there's no basic personal amount to shelter the first $16,452 the way an individual's 2026 return would
canada.ca. The full rate picture, including graduated rate estates, is on trust tax rate.
What does allocating a $90,000 dividend save in 2026?
Your client's family trust owns the common shares of Opco. In 2026 Opco pays the trust a $90,000 non eligible dividend. Two adult children are beneficiaries, and neither has other income. Ava, 27, worked full time in Opco from 2018 to 2023 and is now in graduate school. Ben, 20, is a full time student who has never worked in the business. The trust can keep the dividend, or make $45,000 payable to each child by December 31 and designate it under 104(19) so it stays a dividend in their hands laws-lois.justice.gc.ca.
| Federal tax, 2026 | Kept in the trust | Ava: $45,000 (TOSI excluded) | Ben: $45,000 (TOSI applies) |
|---|---|---|---|
| Actual dividend | $90,000 | $45,000 | $45,000 |
| Grossed up at 15% | $103,500 | $51,750 | $51,750 |
| Rate | 33% | 14% | 33% |
| Tax before credits | $34,155.00 | $7,245.00 | $17,077.50 |
| Dividend tax credit (9/13 of the gross up) | $9,346.15 | $4,673.08 | $4,673.08 |
| Basic personal amount ($16,452 × 14%) | Not allowed | $2,303.28 | Can't reduce TOSI |
| Federal tax | $24,808.85 | $268.64 | $12,404.42 |
Keeping the dividend costs $24,808.85 federally. Allocating it costs $12,673.06 ($268.64 plus $12,404.42), a saving of $12,135.79, and almost all of what's left is Ben's TOSI. The gross up is 15% under 82(1)(b) laws-lois.justice.gc.ca, the credit is 9/13 of the gross up under 121
laws-lois.justice.gc.ca, and the 14% and 33% rates come from the CRA's 2026 table
canada.ca.
Ava escapes TOSI because the excluded business test looks at the current year or any five previous years canada.ca. Ben fails every test open to an 18 to 24 year old who contributed no capital. Before the allocation, check each beneficiary against the TOSI rules; that check usually decides the answer.
When does TOSI catch a trust allocation?
Most of the time when the trust owns a private company. The definition of split income in 120.4(1) includes the part of an amount included under 104(13) that can reasonably be considered in respect of taxable dividends on private company shares, or income derived directly or indirectly from a related business laws-lois.justice.gc.ca. The CRA says trust income is split income if it comes from a related business or from rental activities a related person actively takes part in, and allocated taxable capital gains can be too
canada.ca.
| Beneficiary | Usual result on a private company dividend through the trust |
|---|---|
| Under 18 | TOSI applies; no business or reasonable return exclusion |
| 18 to 24 | TOSI applies unless an excluded business (20 hours a week, this year or any five prior years) or a return on arm's length capital |
| 25 and over | TOSI applies unless excluded business or a reasonable return; the excluded shares route is closed |
| Spouse of an owner who turned 65 | Excluded if the amount would be excluded for the owner |
The excluded shares route is closed because the CRA describes excluded shares as shares owned directly by the individual, with at least 10% of the votes and value held directly canada.ca. Shares the trust owns aren't owned by the beneficiary.
TOSI is reported on Form T1206 and line 40424 of the beneficiary's return canada.ca. Where TOSI applies, 74.5(13) switches off the attribution rules for that amount, so it isn't taxed twice
laws-lois.justice.gc.ca.
Which attribution rules send the income back to the settlor or lender?
Subsection 75(2) is the one that breaks family trusts. If property a person contributed can revert to that person, can pass to persons that person picks after the trust is created, or can't be disposed of without that person's consent, the income, losses and taxable capital gains from it are taxed to that person while they live and are resident in Canada laws-lois.justice.gc.ca. The trust still reports the amounts on its T3 and issues a T3 slip to the contributor
canada.ca.
| Rule | When it bites | Result |
|---|---|---|
| 75(2) | Contributed property can revert to the contributor or is under their control | Income and taxable gains taxed to the contributor |
| 107(4.1) | 75(2) ever applied to the property, and it goes to a beneficiary other than the contributor while the contributor exists | No 107(2) rollover; distribution at fair market value |
| 74.1(2) with 74.3 | An individual lends or transfers property to the trust and a minor family member, niece or nephew is a beneficiary | The minor's share of the income is taxed to the individual until the year the minor turns 18 |
| 74.2 with 74.3 | Same, and the beneficiary is the individual's spouse or common law partner | Allocated taxable capital gains are taxed to the individual too |
The 107(4.1) row is the one that shows up late. It denies the cost rollover on a capital distribution when 75(2) applied to the property at any time and the beneficiary is not the person the property came from laws-lois.justice.gc.ca. That's the rollover family trusts rely on before the 21 year rule deems a sale.
For minors, 74.1(2) attributes income or loss, not capital gains laws-lois.justice.gc.ca, and 74.3(1) sets the minor's share for income allocated from a trust
laws-lois.justice.gc.ca. Capital gains attribute only for a spouse or common law partner under 74.2
laws-lois.justice.gc.ca. A loan to the trust at the prescribed rate, with interest paid within 30 days after each year end, switches off 74.1(1), 74.1(2) and 74.2
laws-lois.justice.gc.ca. The rate is 3% for loans made from October 1 to December 31, 2026
canada.ca; the spousal version is worked through on spousal attribution rules.
How does a family trust multiply the capital gains exemption?
When a personal trust sells qualified small business corporation shares and makes the gain payable to beneficiaries, 104(21.2) has it designate the eligible taxable capital gains, and each beneficiary is deemed to have that gain from qualified small business corporation shares for the capital gains deduction in section 110.6 laws-lois.justice.gc.ca. The trust itself can't claim the deduction. On the T3, the gain goes on line 921 of Schedule 9 and the eligible part on line 930
canada.ca.
Each beneficiary uses their own limit. Finance Canada lists the lifetime capital gains exemption at $1.275 million canada.ca. A trust with three adult beneficiaries that sells Opco for a $3,825,000 gain can shelter all of it, $1,275,000 each, where the owner alone could shelter $1,275,000. Each beneficiary's CNIL and past claims still reduce their room, as lifetime capital gains exemption 2026 explains.
TOSI usually stays out of the way here. A taxable capital gain on qualified small business corporation shares is an excluded amount, unless 120.4(4) or (5) would deem it a dividend laws-lois.justice.gc.ca. Subsection 120.4(4) catches a beneficiary who hadn't turned 17 before the year, on shares disposed of to a non arm's length person: twice the taxable gain becomes a non eligible dividend taxed as split income
laws-lois.justice.gc.ca. So a sale to a family holding company with minor beneficiaries gets no shelter.
If the trust keeps the gain instead, only one half is taxable under 38(a) laws-lois.justice.gc.ca, but the trust's minimum tax exemption is nil under 127.51 and the minimum tax rate is 20.5%
laws-lois.justice.gc.ca. The alternative minimum tax page has the full calculation.
What does a family trust file for 2026, and when?
A T3 return, due 90 days after the trust's year end, with any balance owing due the same day canada.ca. For a December 31, 2026 year end that's March 31, 2027 (see T3 filing deadline). The T3 slips and T3 Summary go out on the same 90 day clock
canada.ca.
A family trust files even in a year with no income. For taxation years ending in 2025, the CRA said all trusts other than bare trusts had to file a T3 including Schedule 15, the beneficial ownership schedule, unless specific conditions were met canada.ca. The T3 guide says Schedule 15 is filed every year it's required, even if nothing changed
canada.ca.
On the slips, each designated amount keeps its identity canada.ca. The boxes your client's beneficiaries will see most:
| T3 slip box | What it shows |
|---|---|
| 21 | Capital gains (twice the beneficiary's share of Schedule 9, line 921) |
| 23 and 32 | Actual and taxable amount of dividends other than eligible dividends |
| 49 and 50 | Actual and taxable amount of eligible dividends (box 49 × 1.38) |
| 26 | Other income, such as interest and net rental income |
The trust also faces a deemed sale of its capital property at fair market value 21 years after it was created, then every 21 years laws-lois.justice.gc.ca. Diarize the date the day the trust is settled; the planning is on 21 year rule for trusts.
Sources
Can the trust keep income but have it taxed at a beneficiary's rate?
Only through a preferred beneficiary election, which a trust and a preferred beneficiary make jointly to include accumulating income in that beneficiary's income, filed within 90 days after the trust's year end canada.ca. The reverse move, a 104(13.1) or 104(13.2) designation to tax allocated income in the trust, is limited to the extent the trust's taxable income stays nil, which in practice means absorbing its losses
laws-lois.justice.gc.ca.
Does the allocation have to be paid in cash by December 31?
No. It has to be paid in the year, or the beneficiary has to be entitled in the year to enforce payment laws-lois.justice.gc.ca. Trustees usually pass a resolution before year end and record the amount owed. The trust can pay later, but the right to payment must exist by December 31.
Are dividends paid to a minor through a family trust attributed to the parent?
No, they are taxed to the minor under TOSI instead. A private company dividend allocated to a beneficiary under 18 is split income laws-lois.justice.gc.ca, and 74.5(13) says the attribution rules in 74.1, 74.3 and 75(2) don't apply to an amount included in split income
laws-lois.justice.gc.ca.
Does a family trust get the basic personal amount?
No. Subsection 122(1.1) limits a trust taxed under 122(1) to the donation credit, the minimum tax carryover and the dividend tax credit laws-lois.justice.gc.ca. Every dollar of retained income starts at 33% federally for 2026.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.