How does the 21 year deemed disposition rule work for a family trust, and what can we do before the anniversary?
The 21 year rule in subsection 104(4) deems most personal trusts to sell capital property at fair market value 21 years after creation, then every 21 years. For 2026 the trust pays the higher of 33% federal tax on half the gain and 20.5% minimum tax on the whole gain, unless it rolls out to Canadian resident beneficiaries under 107(2).
When does each kind of trust hit its deemed disposition day?
Subsection 104(4) says every trust is deemed to dispose of its capital property (other than depreciable property and exempt property) and land inventory at fair market value at the end of each listed day, and to reacquire it at that value right after laws-lois.justice.gc.ca. Depreciable property of a prescribed class gets the same treatment under 104(5), and resource property under 104(5.2). For an ordinary family trust the day is 21 years after the latest of January 1, 1972 and the day the trust was created, then 21 years after each earlier deemed disposition day.
| Trust | First deemed disposition | Then | Provision |
|---|---|---|---|
| Family trust (inter vivos, discretionary) | End of the day 21 years after creation | Every 21 years | 104(4)(b), (c) |
| Testamentary trust for children or grandchildren | End of the day 21 years after creation | Every 21 years | 104(4)(b), (c) |
| Trust that existed on January 1, 1972 | January 1, 1993 | Every 21 years | 104(4)(b), (c) |
| Spousal or common law partner trust | End of the day the spouse or partner dies | 21 years after that death, then every 21 years | 104(4)(a)(iii), (b) |
| Alter ego trust (settlor 65 or older) | End of the day the settlor dies | 21 years after that death | 104(4)(a)(iv), (b) |
| Joint spousal or common law partner trust | End of the day of the later death | 21 years after that death | 104(4)(a)(iv), (b) |
| Bare trust where the trustee acts as agent | None | None | 104(1) |
| Unit trust, RRSP trust, employee trust, employee ownership trust | Excluded | Excluded | 108(1) "trust" (a), (f), (h) |
The last two rows matter. Subsection 104(1) deems a trust not to include an arrangement where the trust can reasonably be considered to act as agent for its beneficiaries, so a bare trust holds nothing that can be deemed sold laws-lois.justice.gc.ca. The beneficial owner reports the gains as they happen, which matches the bare trust filing page. And the definition of "trust" in 108(1) takes registered plans, employee trusts, unit trusts and employee ownership trusts out of 104(4) altogether
laws-lois.justice.gc.ca.
What does the deemed disposition cost a $3 million freeze trust?
Your client's family trust was settled on November 20, 2005 and subscribed $100 for the growth shares of Opco in an estate freeze. Those shares are worth $3,000,100 today. Nobody sells anything, but at the end of November 20, 2026 the trust is deemed to dispose of them for $3,000,100.
| Step | Arithmetic | Amount |
|---|---|---|
| Deemed proceeds | Fair market value at the end of November 20, 2026 | $3,000,100 |
| Adjusted cost base | Subscription price | $100 |
| Capital gain | $3,000,100 minus $100 | $3,000,000 |
| Taxable capital gain | $3,000,000 × 50% | $1,500,000 |
| Regular federal tax in the trust | $1,500,000 × 33% | $495,000 |
| Federal minimum tax (AMT) | $3,000,000 × 20.5%, with no exemption for a family trust | $615,000 |
| Federal tax payable | The higher of the two | $615,000 |
| Federal tax if paid in 10 instalments under 159(6.1) | $615,000 ÷ 10, plus interest | $61,500 a year |
The 33% comes from 122(1): a trust other than a graduated rate estate or qualified disability trust pays the highest individual percentage on every dollar of taxable income laws-lois.justice.gc.ca. For 2026 that rate is 33% on income above $258,482
canada.ca. Provincial tax comes on top. The 50% is the inclusion rate, still one half for trusts in 2026, as the capital gains inclusion rate page sets out.
Minimum tax then overrides the regular figure. For alternative minimum tax, 127.52(1)(d) counts the whole capital gain laws-lois.justice.gc.ca, and 127.51 gives the exemption only to an individual other than a trust or to a qualified disability trust, so a family trust pays 20.5% from the first dollar
laws-lois.justice.gc.ca. Section 127.55(e) exempts a spousal, alter ego or joint trust only for the year of the death day under 104(4)(a), never a 21 year day
laws-lois.justice.gc.ca. The $120,000 excess can be recovered only against later regular tax, as the alternative minimum tax page explains.
The trust has no cash from the deemed sale, and the shares are private company shares that nobody will buy. That gap between a tax bill and no proceeds is why the planning happens before the anniversary, not after it.
How does a 107(2) rollout to beneficiaries avoid the deemed sale?
Distribute the property before the deemed disposition day. Under 107(2), when a personal trust distributes capital property to a beneficiary in satisfaction of that beneficiary's capital interest, the trust is deemed to dispose of it at its cost amount, and the beneficiary takes over that cost laws-lois.justice.gc.ca. In the example, if the trust distributes the Opco shares to its two adult children on November 1, 2026, the trust reports no gain, each child holds shares with a $50 cost, and the $3,000,000 gain waits until they sell or die.
The CRA's T3 guide describes the same route and flags that a resident trust can elect under 107(2.001) not to have the rollover apply canada.ca. The trust deed has to let the trustees distribute capital to those beneficiaries before the date, so read it first.
Three things block the rollout:
| Trap | What happens instead | Provision |
|---|---|---|
| The beneficiary lives outside Canada | Distribution at fair market value, so the trust realizes the gain | 107(5), 107(2.1) |
| 75(2) applied to the property and the beneficiary isn't the contributor | Distribution at fair market value while the contributor exists | 107(4.1) |
| The property goes to another trust | The new trust inherits the old trust's deemed disposition day | 104(5.8) |
In the example, if one of the two children lives in the United States, that child's half goes out at fair market value: a $1,500,000 gain, $750,000 taxable, and $307,500 of federal tax in the trust, because 20.5% minimum tax on the full $1,500,000 beats the $247,500 of regular tax at 33%. Settle residence questions well before November.
Did Budget 2025 change the 21 year rule?
It proposed to. Budget 2025 would broaden the 104(5.8) rule for direct trust to trust transfers to catch indirect transfers, aimed at plans that move trust property to a corporation owned by a new trust budget.canada.ca. Finance's explanatory notes say the amendment applies to transfers of property on or after November 4, 2025
fin.canada.ca.
As of October 2026 it isn't law yet. The amendment sits in the Notice of Ways and Means Motion for the Budget 2025 Implementation Act, No. 2, which rewrites the opening of 104(5.8) to reach property held directly or indirectly by another trust fin.canada.ca. The consolidated 104(5.8), current to September 21, 2026, still covers only a transfer from one trust to another trust
laws-lois.justice.gc.ca. Because it would apply back to November 4, 2025, plan any distribution to a corporation owned by another trust as if it were already enacted.
How do you report the deemed disposition and spread the tax?
Report it on Form T1055, Summary of Deemed Dispositions, filed with the T3 for the year that contains the deemed disposition day canada.ca. The T3 guide says T1055 works out the adjustment to Schedule 1, the gains your client's net capital losses can absorb, and the tax the trust can elect to defer
canada.ca. For a calendar year trust with a 2026 anniversary, the T3 is due March 31, 2027 (the T3 filing deadline page has the 90 day count).
To spread the bill, file Form T2223 canada.ca. Subsection 159(6.1) lets the trust pay the extra tax caused by a 104(4) day in up to 10 equal consecutive annual instalments, if it posts security acceptable to the CRA, and 159(7) charges interest at the prescribed rate in effect when the election is made
laws-lois.justice.gc.ca. The current rate is on the prescribed interest rates page. The guide says the election must reach the tax services office no later than the T3 due date for that year
canada.ca.
Sources
Finance Canada: explanatory notes, Budget 2025 Implementation Act, No. 2fin.canada.ca
Does the 21 year rule apply to a bare trust?
No. Subsection 104(1) deems an arrangement where the trustee acts as agent for the beneficiaries not to be a trust, so there's no trust property to deem sold laws-lois.justice.gc.ca. The beneficial owner reports gains on their own return when a real sale happens.
Can the trust just move its assets to a new trust to restart the clock?
No. Under 104(5.8), property transferred on a rollover from one trust to another keeps the transferor trust's deemed disposition day laws-lois.justice.gc.ca. The Budget 2025 amendment would extend that to indirect transfers made on or after November 4, 2025
fin.canada.ca.
Is a spousal trust deemed to sell its property at 21 years?
No. A spousal or common law partner trust has its first deemed disposition as the day of the spouse or partner's death closes, and the 21 year count runs from that death laws-lois.justice.gc.ca.
Does the deemed disposition cover the trust's rental building?
Yes. Land is capital property under 104(4), and the building is depreciable property caught by 104(5), which deems it sold at fair market value and reacquired at that value, with any excess of the old capital cost treated as capital cost allowance already claimed 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.