The 21-year rule is tightening: why every trust anniversary needs a second look

November 2026 · Planning

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Summary: A Budget 2025 proposal would stop indirect transfers through corporations from resetting a trust's 21-year clock, which makes knowing each trust's true deemed-disposition date more important.

Many Canadian families who built their wealth through private companies did it with a discretionary family trust somewhere in the structure. Often that trust was set up as part of an estate freeze in the 1990s or 2000s. A good number of those trusts are now approaching, or have recently passed, their 21st anniversary. A proposal in the November 2025 federal budget makes that date harder to move, and it reaches structures that many advisors would not have connected to the trust at all.

A quick refresher on the rule

Under the Income Tax Act, most personal trusts are deemed to dispose of their capital property at fair market value every 21 years, generally starting on the 21st anniversary of the trust's creation. Any accrued gain is taxed in the trust at that point, even though nothing has been sold. The rule exists to stop gains from being deferred indefinitely across generations.

The usual planning response is well known. Before the anniversary, trustees can distribute property to Canadian-resident capital beneficiaries on a tax-deferred basis, so the gain is deferred until the beneficiary disposes of the property. Other options include paying the tax and resetting the cost base, or restructuring in other ways. Each option has consequences for control, creditor protection and family dynamics, which is why the decision usually takes months rather than weeks.

There has long been an anti-avoidance rule in subsection 104(5.8) aimed at one workaround: transferring property from an old trust to a new trust on a tax-deferred basis to start a fresh 21-year clock. Where that rule applies, the receiving trust inherits the original trust's deemed-disposition date.

What Budget 2025 proposed

The November 4, 2025 budget proposed widening that anti-avoidance rule so it covers transfers made indirectly, not only direct trust-to-trust transfers. The example in the budget commentary is a trust that distributes property on a tax-deferred basis to a corporate beneficiary, where that corporation is owned by a new trust. Under the current wording, that route could arguably reset the clock. Under the proposal, the new trust would face its deemed disposition on the same date as the original trust.

According to practitioner commentary, the proposal applies to transfers of property made on or after November 4, 2025. Commentators have also noted that the CRA had already treated this kind of transaction as one it would challenge, and had listed it among notifiable transactions, so the measure largely puts an existing CRA position into the statute.

Where the proposal stands

This is important to state carefully. The Department of Finance released draft legislation for this measure on January 29, 2026, with comments due by February 27, 2026. Industry groups, including STEP Canada, argued the draft was drawn too broadly and could catch ordinary estate planning, such as transactions involving life interest trusts, where no one was trying to avoid the 21-year rule.

The measure was not among those enacted in Bill C-15, the budget implementation act that received Royal Assent on March 26, 2026. A narrowed version is in Bill C-31, the Budget 2025 Implementation Act, No. 2, tabled on May 6, 2026. At the time of writing, that bill is still before Parliament.

Even as a proposal, it matters. Proposed tax measures in Canada typically apply from the date announced once enacted, and advisors generally plan on the assumption that they will be. A transaction completed in 2026 could be measured against the new rule later.

Why this is mostly a records problem

The policy debate is for tax counsel. For an investment counsel firm or family office, the practical issue is simpler and more uncomfortable: do you know, for every trust in a family's structure, its real deemed-disposition date?

Under the proposed rule, that date may not be the 21st anniversary of the trust's own settlement. If a trust received property indirectly from an older trust, through a corporation that the newer trust owns, it may carry the older trust's date. Working that out needs three things that are often kept in different places:

  • The settlement date of every trust, taken from the trust deed rather than from memory or an old planning memo.
  • The ownership chain between entities, including which trusts own which holding companies, and in what percentages.
  • The history of transfers, especially distributions from trusts to corporations since November 4, 2025, and any earlier trust-to-trust transfers that may already have carried a date forward.

A family with a single trust and a single holding company can track this on paper. A family with an older freeze trust, a newer trust created for grandchildren, two or three holding companies and a partnership cannot do it reliably that way. The risk is not usually aggressive planning. It is a reorganization done years ago, for unrelated reasons, that nobody linked back to the 21-year calendar.

A practical review for the next quarter

A short, structured review can surface most of the exposure:

  1. List every trust in each family's structure, with its settlement date and its next 21-year date as currently understood.
  2. Draw the ownership chain. For each trust, note which corporations and partnerships it owns, directly and indirectly, and which other trusts sit above or below them.
  3. Flag any trust within roughly five years of its anniversary. Distribution planning, valuations and family discussions take time, and the anniversary date does not move.
  4. Flag any transfer since November 4, 2025 from a trust to a corporation or partnership owned by another trust. These are the transactions the proposal is aimed at, and they should be reviewed with the family's tax advisor.
  5. Keep the deed and the advice together. Store the trust deed, any prior 21-year analysis and the tax advisor's current view in one place, so the next person to look at the file does not have to rebuild it.

None of this requires a view on whether the proposal is good policy. It only requires the structure and its dates to be visible.

Closing thoughts

The 21-year rule has always rewarded families that plan early and penalized those that discover the date late. The Budget 2025 proposal adds a new way to discover it late: a date inherited through a corporation that no one connected to the trust. Firms that keep each family's entities, ownership percentages and key dates in a single, connected record will find these anniversaries well before they become urgent. That is the problem Mozaiik's entity-first wealth map and key-dates tracking were designed to address.

This article is general information, not tax or legal advice. The measure described is a proposal; confirm its current status and its application to any specific trust with a qualified tax professional.

Sources

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