Many private company owners must now decide between transferring capital or paying millions in tax
Recent changes to Canada’s 21‑year deemed disposition rule for trusts have shifted tax planning from a technical footnote to an existential event for many families and their businesses, tax lawyer Lucas Richard‑Gérard says. As Ottawa shuts down once‑popular strategies, those who have set up trusts holding shares in private companies will either pay a large tax bill or be forced to make immediate plans to pass along assets to family.
At the heart of the regime is paragraph 104(4)(b) of the Income Tax Act, which deems a trust to have disposed, at fair market value, of each of its capital properties (other than depreciable property) and certain business inventory 21 years after the trust was created, and to have reacquired them at that value. The same logic is echoed in Quebec’s tax legislation. That deemed sale can crystallize decades of gains on a private company in a single year.
There are important carve‑outs. Subs. 108(1) excludes a range of arrangements from the “trust” definition for these purposes, including RRSPs, RRIFs, TFSAs, DPSPs, retirement compensation arrangements and employee trusts. The deemed disposition can also be avoided where all interests in the trust have vested irrevocably, subject to exceptions for spousal and self‑benefit‑type trusts. But for the typical discretionary family trust that owns operating‑company shares, the rule will apply.
Richard-Gérard, who practises at Lavery in Montreal, explains that, even though the wording of paragraph 104(4)(b) has not changed, the enforcement landscape has shifted. He notes that new federal reporting rules now require most express trusts to file annual T3 returns and disclose the identities of settlors, trustees, beneficiaries and certain controlling persons, closing off the quiet adjustments some practitioners once relied on. “There’s no secret anymore,” he says. While bare trusts have been carved out of most T3 filing obligations for now, family business and estate-freeze trusts sit squarely within the regime.
That greater visibility feeds into professional risk for lawyers and trustees. In the past, some practitioners quietly rewrote trust deeds or added new beneficiaries as the anniversary approached, hoping to retool structures without attracting attention. Lawyers who created these trusts may now be responsible for reminding clients of the 21st‑anniversary rule, he says, which can turn poor planning into a potential negligence issue.
The pressure is highest where planning has been most aggressive, in what Richard‑Gérard tactfully calls “exotic planning.” In a common version, the trust shifted assets into a holding company owned by a new trust, effectively restarting the 21‑year clock and pushing the tax bill forward, so that by the time the original trust hit its anniversary, it held no property at all.
The CRA first warned in 2016 that using a company owned by a new trust to sidestep the 21‑year date offended the purpose of the rules and could attract the general anti-avoidance rule, a broad rule that lets tax authorities strike down transactions designed mainly to avoid tax. It's newer notifiable transaction label now squarely targets that pattern and, combined with recent legislative changes, means “we know for a fact that this type of planning is not possible,” Richard-Gérard says.
The 2025 federal budget proposes to broaden subs. 104(5.8) so that it applies where trust property is transferred “directly or indirectly in any manner whatever” from one trust to another, capturing indirect transfers routed through intermediate entities such as corporations. The measure, aimed squarely at rollover transfers to corporate beneficiaries owned by new trusts, would apply to property transferred on or after November 4, 2025.
Canada’s mandatory disclosure rules add another layer of pressure. The regime now requires taxpayers, advisors, and promoters to report certain “reportable” and “notifiable” transactions, including those intended to avoid the 21-year rule, with significant penalties for non-compliance and extended reassessment periods when reporting is missed. Whatever lawyers might have done quietly, “our scope of action is reducing at this point,” he says.
With that door closed, planning looks more traditional and more constrained. Trustees must decide whether the trust will absorb the tax at the top marginal rate, or use an estate freeze and distributions so that, by year 21, the trust holds only low‑value common shares “with no value” when the deemed disposition hits, he says. Those options force families to move significant value to the next generation while the founders are still alive, even if they are uncertain how much they will need.
The human side of that decision is often the most difficult part of the file. The original settlors are often older owner‑managers who remain active in businesses that can be valued in the millions. They are being asked to choose, on a firm deadline, how much of a company they are prepared to hand to their children today. “You’re telling them, hey, you’re not dead, and by the way, you’re transferring your capital to your kids now, which is a whole different scenario,” Richard-Gérard says.
In one recent case, an accounting firm for his client only noticed the looming 21-year date while preparing the trust’s return for a family with about $50m in assets. Richard‑Gérard spent the weekend in the office implementing a freeze and distribution between a father in his late 60s and his daughter, racing the calendar rather than designing the structure within a more reasonable timeline.
Those last‑minute rescues are exactly what he expects to see more often. “You cannot postpone the planning… when it’s done, it’s done,” he says. Because the 21-year rule applies to both common law and civil law trusts, he says, any practice that touches private companies or family wealth needs systems to flag impending anniversaries, identify high-risk structures, and bring in tax specialists early, before the CRA and the calendar remove the remaining room to move.
