How to Avoid Capital Gains Tax with a Trust in Canada

Can you avoid capital gains tax with a trust?

You can’t completely avoid capital gains tax with a trust.

However, a trust can help by allowing for tax planning strategies that wouldn’t otherwise be available. For example, a trust can allow you to defer tax that you would have to pay sooner. It can also help you minimize capital gains tax through an estate freeze. 

You can allocate capital gains to multiple beneficiaries who may be in a lower tax bracket. In addition, if you have qualified property, multiple beneficiaries may be able to use their own Lifetime Capital Gains Exemption (LCGE) to minimize or reduce the capital gains tax. 

Essentially, trusts can give you greater flexibility in tax planning.

Written By Tiffany Woodfield, Financial Advisor, TEP®, CRPC®, CIM®

Table of Contents

1. What Are the Best Ways to Minimize Capital Gains Tax?
2. Who Needs a Trust in Canada?
3. Who Doesn’t Need a Trust in Canada?
4. Mini Trust Case Study
5. What Matters Most When Making Estate Planning Decisions?

What Are the Best Ways to Minimize Capital Gains Tax?

When planning for wealth transfer, it’s important to consider strategies to minimize capital gains tax so your wealth is preserved for your loved ones. Keep in mind that a trust isn’t the only way to minimize capital gains.

Spousal Trusts

People may consider a spousal trust when they have blended families and want to provide for a surviving spouse during the spouse’s lifetime while preserving capital for their own children.  A spousal trust protects the settlors’ interests and ensures both the spouse and the children are provided for.  With just a will, your dependents may be able to make a claim under BC’s Wills, Estates and Succession Act (WESA). If successful, the courts may change the will’s distribution to what is “just and equitable.”  

Living trusts generally do not go through probate, and assets can be transferred directly to beneficiaries according to the trust’s instructions. 

Alter Ego Trusts and Joint Partner Trust

Both an alter ego trust and a joint partner trust are living trusts, meaning they are established during your lifetime and bypass probate upon death. 

The benefit of these trusts is that your assets can be directly transferred to your intended beneficiaries, avoiding the costly, public probate process. 

An alter ego trust can be established for an individual aged 65 or older who will receive all income or capital for life. 

A joint partner trust is for the settlor and their spouse. The settlor must be 65 or older, and both the settlor and their spouse are entitled to the capital and income. 

These particular trusts have the additional benefit of avoiding triggering capital gains tax when you place the assets in the trust. This ability to avoid capital gains differs from other trusts, where it is as if you sold the assets for the fair market value when you fund the trusts. If your assets are deemed to be disposed, then you would have to report any capital gains and pay tax if owed. 

Income Splitting and Allocation to Beneficiaries

A trust can allow income and capital gains to be allocated among multiple beneficiaries rather than taxed in one person’s hands. If beneficiaries are in lower tax brackets, this may reduce the overall tax paid on trust income or capital gains. This strategy must be done carefully and in compliance with Canadian tax law, including attribution and TOSI (Tax on Split Income) rules. 

When structured properly, income splitting can be an effective way to minimize capital gains tax within a family.

Spousal Rollovers

A spousal rollover is a provision in the Income Tax Act that allows the transfer of assets between spouses without triggering immediate tax. It is an automatic process that applies to transfers between spouses, whether they are during your lifetime or upon death. 

One caution: if the transfer occurs while you are alive, “attribution rules” may apply. 

These rules serve as safeguards for tax authorities, preventing individuals from transferring assets to a spouse in a lower tax bracket in order to evade taxes. Speak to your tax lawyer to determine if the attribution rules apply in your situation. 

Estate Freezes

An estate freeze allows the current owner(s) to freeze the value of their shares in a private corporation, so that any future growth can be passed on to the next generation.  An estate freeze allows the owners to defer the tax on future growth, which will be in the beneficiary’s hands.  

A trust is the structure that enables this estate freeze. 

Lifetime Capital Gains Exemption

The Lifetime Capital Gains Exemption (LCGE) can significantly reduce or eliminate the capital gains tax an individual may face on the portion of their gain. 

When a trust holds qualified shares, it can allocate them among multiple beneficiaries, allowing each to use their individual LCGE. A trust enables the exemption to apply to the sale of shares in a Qualified Small Business Corporation (QSBC) or qualified farm or fishing properties (QFFP). 

Certain rules must be followed for this exemption to be valid, including that the properties be qualified and that at least 90% of the business be active in Canada. 

Important Warning about the 21-Year Deemed Disposition Rule

In Canada, the 21-Year Deemed Disposition Rule applies to most trusts and can incur high costs if not properly managed. 

Essentially, every 21 years, the trust is treated as if it has sold all its capital property at fair market value, which would trigger capital gains taxes if the assets have appreciated. Therefore, it is vital to have a plan to reduce taxes by distributing assets to beneficiaries before reaching the 21-year deadline.

Who Needs a Trust in Canada?

People who can  benefit from a trust in Canada are people with:

• High net worth generally 3 million plus
• Complex estates
• Blended families
• Family businesses
• Family members or beneficiaries who are vulnerable
• A desire to avoid probate

In general, if you are looking for greater flexibility, additional strategies, and greater control for estate planning, a trust can be a useful option.

Who Doesn’t Need a Trust in Canada? 

If you have a straightforward estate and can use beneficiary designations or hold assets jointly, it may be more practical to rely on a will rather than establish a trust. Using a will can simplify the process, making it easier and less expensive. Remember, the benefits of creating a trust should outweigh the costs and complexities involved, so it’s important to carefully assess your unique situation. 

Mini Trust Case Study

I was recently speaking with clients who decided to use a trust as part of their estate plan. 

I want to share a little bit about why a trust worked for them so you can see if any of their goals and concerns align with yours.  

This couple has a high net worth, multiple real estate properties, and investment portfolios. They want to pass their assets to their two daughters and future grandchildren.  

Their goal was to transfer some of their wealth while they were alive and have a plan for how the rest of the assets would be distributed after their death. 

They chose to use a trust to retain control over when and how the assets are distributed. 

By working with a tax planner and legal advisor, the trust was structured to strategically allocate assets, capital gains, and income to beneficiaries. Using a trust meant they didn’t have to give a one-time gift, which would have been a significant tax burden. Instead, it was an opportunity to educate their kids on their values around wealth management and to provide funds for their kids right now.  

My clients were able to maintain control of their wealth, reduce taxes, and provide opportunities for their adult children. The process allowed them to create an estate planning structure that saves on probate fees, maintains privacy, and ensures the assets remain within the family lineage. 

In this case, the trust created flexibility, tax efficiency, and long-term control that a simple will could not have provided.

What Matters Most When Making Estate Planning Decisions?

Estate planning tools are powerful, but the right approach depends on what you are trying to achieve. 

There is no single strategy that works for everyone.

Many people delay estate planning out of fear, while others over-engineer plans in an attempt to control every outcome. In both cases, decisions are often made without first clarifying what truly matters.

Ask yourself, “What matters most to me?” 

Get clear on what matters most so you can be sure that you’re making the right decisions based on your values, goals, and the legacy you wish to leave.

Estate planning decisions are not purely technical. 

Emotions and family dynamics all play a role. 

When clarity comes first, legal and tax strategies can be evaluated more effectively and aligned with your goals. Approach your estate planning as an opportunity to connect with what matters most to you so that you can leave a legacy that truly reflects your values.

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Read More:

💎 What Is Estate Planning in Canada?

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💎 Simple Estate Planning Checklist for Canadians in 2026

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