Tax rules for family trusts have been tightened over the last decade. Even so, a family trust is still one of the best tax savings tools available to wealthy families and business owners in Canada. The benefits have changed but are still significant. The following is a straightforward overview of what a family trust can help you accomplish.

What is a family trust?

A family trust is a legal arrangement with three main parties:

• The settlor, who opens the trust by giving a small gift ⁠–⁠ often a silver coin or a small amount of cash.
• The trustee(s), who manage the trust property and decide who gets what, when. Parents are often the trustees.
• The beneficiaries, who receive money or property from the trust. They are usually a spouse, children and/or grandchildren. A family company can also be a beneficiary.

Most family trusts are discretionary, which means the trustees choose how much each beneficiary receives each year. Nothing is locked‑in for a longer period, and that flexibility is where much of the value comes from.

One key tax point to understand: if a trust holds its income, that income is taxed at the highest personal rate. So, in practice, it is better if the trust pays income out to family members each year, and they then pay tax at their own lower rates instead.

Here’s an overview of the four key benefits of family trusts.

Benefit 1: Estate freeze

Upon death, the tax system treats you as if you sold everything you own at full market value. If you are the owner of a growing company, this can create a significant tax bill. In some cases, your family may need to sell the business just to settle the debt owing.

An estate freeze with a family trust solves this problem. You trade your regular shares for special “frozen” shares worth what the company is worth today, and a new family trust buys new regular shares for a token amount. From that point on, all future growth in the company belongs to the trust rather than to you.

As a result, your tax bill at death is capped at today’s value. It becomes a known number you can plan for and even insure against. Future growth is taxed later, in your beneficiary’s hands, and only upon sale of the shares. Best of all, you can stay in control the whole time by keeping the voting shares for yourself or acting as the trustee. Many owners freeze their estate years prior to stepping back from their business.

Benefit 2: Multiplying the capital gains exemption

Every Canadian gets a lifetime capital gains exemption on the sale of qualifying small business shares. For 2026, the limit is $1,275,000 per person. Used fully, that saves an Ontario resident roughly $340,000 in tax.

This scenario is where a family trust shines. The trust itself cannot claim the exemption, but when the business is sold, it can pass the gain out to its beneficiaries, and each of them can use their own exemption. A family of four could shelter more than $5,000,000 of gain on the sale of the family business. For many business owners, this is the single biggest dollar benefit a trust can deliver.

One caveat: the shares must qualify as small business shares at the time of sale and for the period leading up to it. This takes advance planning, so talk to your advisor well before any sale is on the table.

Benefit 3: Income splitting that actually works

Regulations introduced in 2018 ⁠–⁠ the tax on split income (TOSI) rules ⁠–⁠ stopped many families from paying dividends to relatives who do not work in the business. But some income splitting doors are still open. Dividends can still flow to adult family members who regularly work in the business, and to your spouse once you turn 65. Gains covered by the capital gains exemption also escape these rules.

Additionally, prescribed rate loans have become attractive again since the government’s official rate has dropped to 3%. Here’s how they work:

• A high‑income family member lends money to the trust at the 3% rate, which stays locked in for the life of the loan.
• The trust invests the money.
• The investment income goes out to family members in lower tax brackets, such as adult children in school.
• Only the 3% interest comes back to the lender to be taxed at their higher rate.

As long as the investments earn more than 3%, the family saves tax every year. This works especially well for funding education and other family costs.

There is one note of caution regarding the alternative minimum tax (AMT) though. Before setting up or continuing a prescribed rate loan trust, be aware the AMT can take a bite. Since 2024, under the AMT, only half of the interest the trust pays on the loan is deductible, and family trusts get no AMT exemption. As such, even a trust that pays out every dollar of income each year can now owe a tax rate of 20.5% federally, plus a provincial amount, on the disallowed half of the interest. So, a trust paying $30,000 of loan interest can expect a federal AMT bill of roughly $3,000, despite owing nothing under the old rules.

In theory, this tax is refundable against regular tax over the next seven years. In practice, a trust that pays out all its income never owes regular tax, so the AMT often becomes a permanent cost.

The strategy is not dead, but the math has changed. Have your advisor weigh the yearly AMT cost against the savings to ensure the trust holds back enough cash to pay the bill each spring, and consider whether restructuring the loan makes sense. Most families still come out ahead, but by a thinner margin than before.

Benefit 4: Skipping probate and protecting assets

Tax savings are only part of the family trust story. Property held in a trust is not part of your estate, so it avoids probate and Ontario’s estate administration tax. Plus, it remains private rather than showing up in public probate records.

A properly established trust also acts as a wall around family wealth. Creditors have a hard time reaching property inside a trust, and a well‑drafted trust can help shield assets from a beneficiary’s marriage breakdown. The catch is timing: the trust must be created while things are going well, not after trouble has begun.

Finally, a trust allows you to provide for children or family members who are young, vulnerable or imprudent with money, without simply handing them a cheque. The trustees control the timing and conditions of every payment.

Family trust costs and key rules

A trust is not free of obligations. Here are the most important rules to keep in mind:

• The 21‑year rule: Every 21 years, the trust is treated as if it sold everything it owns and tax is due on the gains. Most families avoid this by transferring property out to the beneficiaries before the trust’s 21st birthday. Start planning around year 18.
• Annual tax filings: Most trusts must file a T3 tax return every year, plus a form listing everyone connected to the trust. The penalties for skipping this are steep.
• Setup and running costs: Expect legal fees to set up your trust, a valuation if you are doing a freeze and yearly accounting fees.

Because of these costs, a trust makes the most sense when the wealth, business value or family goals involved are large enough to justify the structure.

The bottom line

Family trusts are not what they once were but still deliver real results: a capped tax bill at death through an estate freeze, multiplied capital gains exemptions when the business sells, income splitting through work in the business or a 3% prescribed rate loan (once the AMT cost is factored in), as well as probate savings, privacy and protection along the way.

The rules are complex and mistakes costly, so this is not a do‑it‑yourself project. If you would like to learn whether a family trust fits your situation, or whether your existing trust is ready for its 21st anniversary, our tax team is happy to help.

It’s a matter of trust