The 2025 Canadian federal budget introduced significant changes to the taxation framework for trusts, notably tightening rules around the trust-to-trust transfer provisions designed to restrict tax avoidance related to the 21-year deemed disposition rule.
What Is the 21-Year Deemed Disposition Rule?
In Canada, most personal trusts are subject to the 21-year deemed disposition rule. This rule requires that every 21 years from the trust’s creation (or from the last rollover event), the trust must be treated for tax purposes as if it has disposed of all its capital property at fair market value and reacquired them immediately. The purpose is to prevent indefinite deferral of capital gains tax liability on appreciated assets over multiple generations. While the trust itself can continue, the rule triggers recognition of accrued gains and related tax liabilities.
Certain trusts, such as spousal/common-law partner trusts or alter ego trusts, are exempt from this rule, as the deemed disposition occurs only upon the death of the life interest beneficiary rather than on the 21-year anniversary.
Budget 2025: Closing Loopholes on Indirect Transfers
Prior to the 2025 budget, anti-avoidance legislation prevented a trust from transferring property directly, on a tax-deferred basis, to another trust in a way that resets or sidesteps the 21-year clock. Any such transfer would cause the new trust to inherit the original’s 21-year anniversary date, preserving the intended timing of the deemed disposition and related tax charge.
However, despite these provisions, sophisticated planning structures found a path around. For instance, transferring trust property indirectly to a new trust by routing assets through a corporation owned by the new trust beneficiary, circumventing the direct trust-to-trust transfer rule and effectively resetting or avoiding the 21-year rule’s impact.
Budget 2025 closed this loophole by expanding the anti-avoidance rule to include indirect transfers of trust property to other trusts. Effective from Budget Day (November 4, 2025), any property transferred directly or indirectly to another trust will inherit the original trust’s 21-year deemed disposition date.
Planning Implications
The standard trust approach remains viable: distributing or “rolling out” trust assets with accrued gains to Canadian resident capital beneficiaries before the trust’s 21st anniversary. This avoids the deemed disposition event within the trust itself by transferring the tax to beneficiaries who may have access to different tax treatment or planning options.
Bottom line
This policy change signals the government’s resolve to enforce the 21-year rule. It is a targeted measure addressing a clear tax planning loophole rather than part of sweeping tax reform.
SANDSTONE works with families to optimize their wealth planning strategies and safeguard assets for future generations. In light of the above, it’s prudent that trustees carefully review trust structures and asset transfer strategies with their advisors to ensure compliance and anticipate tax liabilities that may crystallize as a result of the 21-year rule change.