The 21-Year Rule: What Trust Holders Need to Know Before 2026

Under the Income Tax Act, every trust is deemed to have disposed of all its capital property at fair market value on the 21st anniversary of its creation. This deemed disposition triggers any unrealised capital gains that have accumulated within the trust — regardless of whether any actual sale or transfer has occurred.

For family trusts established in the early 2000s, these 21-year anniversaries are approaching. And for many trust holders, the tax consequences have not been adequately planned for.

The deemed disposition rule exists to prevent trusts from being used as indefinite deferral vehicles. Without it, capital gains on appreciated property could remain unrealised — and untaxed — across generations. The 21-year rule ensures that, at minimum, each generation of trust property faces a tax reckoning.

The planning opportunities, however, are substantial — provided they are executed before the anniversary date. These include distributing trust property to capital beneficiaries (which can be done on a tax-deferred basis under subsection 107(2)), triggering selective dispositions to crystallise gains at lower current values, and restructuring the trust's holdings to minimise the impact of the deemed disposition.

The critical constraint is timing. Distributions and restructurings must be completed before the 21-year anniversary. Retroactive planning is not available. Once the deemed disposition occurs, the tax liability is established.

Trust holders should review their trust's establishment date, current fair market value of trust property, and the tax cost base of those assets. Where a significant gap exists between cost base and current value, proactive planning is not optional — it is essential.