How are trusts taxed in Canada?
Most trusts are taxed as separate individuals but at the top marginal rate on income they retain. Since 2016, testamentary trusts and inter vivos trusts no longer benefit from graduated brackets — the main exceptions are a graduated rate estate (GRE) and a qualified disability trust (QDT).
What is a graduated rate estate (GRE)?
A GRE is the estate of a deceased person for up to 36 months after death, provided it is designated as such and meets the requirements. During that window it is taxed at the same graduated rates as an individual, which can produce meaningful tax savings before the trust reverts to top-rate taxation.
Can trust income be taxed in the beneficiary's hands?
Yes. Income that is paid or payable to a beneficiary in the year is generally deducted by the trust and taxed to the beneficiary at their personal rate. Because beneficiaries are often in lower brackets, distributing income can substantially reduce the overall tax compared with retaining it in a top-rate trust.
What is the 21-year deemed disposition rule?
Most Canadian trusts are deemed to dispose of their capital property at fair market value every 21 years, triggering capital gains tax on accrued gains. Trustees often plan distributions to beneficiaries before this anniversary to avoid a large tax bill inside the trust.