How Long Can Money Stay in a Trust Account in Canada?

How long can money stay in a trust in Canada?

In Canada, most personal trusts, such as family trusts, are subject to a 21-year deemed disposition rule under the Income Tax Act.

The 21-year rule means that the trust is deemed to have sold its assets after 21 years. This can trigger capital gains tax unless assets are distributed or other planning is done.

While the rule against perpetuities (which limits how long interests can remain unvested) has been reformed or abolished in many provinces, trusts do not truly last forever due to tax rules. 

Money typically cannot stay indefinitely without periodic tax events or distributions. However, you should speak to your estate lawyer to get more information on your specific situation.

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

Table of Contents

1. What is the 21-year rule?
2. What is a deemed disposition?
3. How long do trust funds last?
4. What happens when money is left in a trust?
5. FAQ
6. Mini Trust Case Study
7. What Matters Most When Making Estate Planning Decisions?

What is the 21-year rule?

The 21-year rule is a Canadian tax rule that applies to most trusts, including family trusts. 

Every 21 years, the trust is treated as if it sold all of its capital assets at fair market value. This can trigger capital gains tax even if no assets are actually sold. However, with proper planning, assets may be distributed or restructured before the 21-year mark to help manage or reduce the tax impact.

What is a deemed disposition?

A deemed disposition means the Canada Revenue Agency treats assets as though they were sold, even though no sale actually took place. 

This rule exists to prevent capital gains from being deferred indefinitely. When a deemed disposition occurs, any increase in value may result in capital gains tax. In trusts, the most common deemed disposition happens under the 21-year rule. 

How long do trust funds last?

From a legal perspective, a trust can last for many decades, depending on how it is structured and the provincial law. 

However, from a tax perspective, trusts are subject to periodic tax events, most notably the 21-year deemed disposition, as mentioned previously. This means creating a trust is not a “set it and forget it” strategy. Ongoing review is essential to ensure the trust continues to meet its goals efficiently.

In Canada, a trust is considered a separate taxpayer.

What happens when money is left in a trust?

When money remains in a trust, income and capital gains may be taxed either in the trust or in the hands of the beneficiaries, depending on how the trust is managed. 

In Canada, a trust is considered a separate taxpayer. If money is left in the trust and earns income, it is generally taxed at the highest marginal tax rate. This is why, each year, it is common for the trustee to distribute income to beneficiaries who may be in a lower tax bracket.  

Over time, tax rules such as the 21-year rule can create significant tax consequences if assets appreciate and no planning is in place. 

FAQ

Who pays tax on a trust account in Canada?

In Canada, a trust generally pays tax on income it retains at the highest marginal tax rate. If income is paid or made payable to beneficiaries, the beneficiaries are responsible for reporting the income on their tax return and are subject to tax at their marginal tax rate. 

When can you take money out of a trust fund?

Money can only be withdrawn from a trust in accordance with the terms set out in the trust document. The trustee is responsible for controlling timing and amounts and must follow the rules established by the trust.

What are the disadvantages of putting money in a trust?

Trusts can be costly to set up and maintain. They also add complexity to estate planning. Income retained in a trust is often taxed at higher rates than personal income. In addition, the money and other assets you put into a trust are now owned by the trust and controlled by the trustee.  It is difficult if you “change your mind.”

Does a trust fund ever expire?

In Canada, most trusts are subject to the 21-year deemed disposition rule for tax purposes. This does not end the trust, but it can trigger capital gains tax on trust assets.

Who controls the money in a trust?

The trustee controls the money in a trust and is legally required to act in the best interests of the beneficiaries. The trustee must follow the trust document and applicable Canadian laws.

Mini Trust Case Study: How an Alter Ego Trust Gave Jeff Peace of Mind in His Second Marriage

Jeff* is a client of mine in his late 60s who was preparing to remarry. 

He was financially secure and had a daughter in her 20s. His fiancée was not as financially well-established as he was. She also had a daughter in her 20s. 

Jeff was concerned about what would happen to his assets if he were to die.  He was concerned about how the assets might be distributed and whether his daughter would be cared for as he intended, even if he had a will. 

He had heard a troubling story about someone who recently passed away. The man had been married twice and had 2 kids from his first marriage. Although his second marriage had only lasted three years before he passed, his second wife claimed she needed financial help and applied to the court for dependency relief.  

He heard that the court had “varied the will” to give more money to the second wife, significantly reducing the amount his two children received. Whether the story was true or not, it created a fear in him about the threat of a court changing his will and the rights under the Wills, Estate and Succession Act (WESA).

Because Jeff was over 65, his lawyer recommended establishing an alter ego trust. 

This is a living trust, which has the added benefit of not triggering capital gains when assets are transferred to the trust. He will receive income and capital from the trust during his lifetime, and upon his death, the assets will be distributed in accordance with the trust’s terms. 

This strategy gave him peace of mind, knowing that his wishes would be honored and that his loved ones would be cared for. His decision didn’t stem from a lack of desire to care for his new wife; rather, he wanted to ensure he could choose how to care for everyone, rather than risk a judge varying his will. 

It’s important to consult a legal or financial advisor familiar with trusts and estates in British Columbia to understand the specific implications for your situation and ensure compliance with applicable law.

*Client names and identifying details have been changed to protect their privacy.

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.

Get the Free Guide and Audio Meditation for Manifesting Your Dreams

Pop your email address in the form below to get my easy checklist and guide to manifesting and the guided audio meditation to help you get started.

You’ll also get one or two emails per month with the latest blog posts about abundance, wealth-building, manifesting, and creating a fulfilling life.

Read More:

💎 What Is a Living Trust in BC?

💎 What Are Reasons to Not Have a Trust in Canada?

💎 When to Use a Trust for Estate Planning in Canada

About the Author