How trust funds work in Canada, and who must file

A trust fund in Canada is a legal arrangement in which one person, the settlor, hands property to a trustee who manages it for one or more beneficiaries, and for tax purposes the trust is treated as its own taxpayer that usually must file a yearly T3 return with the Canada Revenue Agency.

Trusts are governed by provincial law, which sets out the duties of trustees, and by the federal Income Tax Act, which decides how trust income is taxed. A valid trust generally needs a clear intention to create it, identifiable property and identifiable beneficiaries. The document that sets it up, often a will or a trust deed, spells out who can receive income or capital, when, and how much discretion the trustee has.

The CRA divides trusts into two broad groups. A testamentary trust arises as a result of a death, usually through a will. An inter vivos trust is any other trust, including one set up by a living person, according to the agency’s guide to trust types. Within those groups are several special categories. A deceased person’s estate can be designated a graduated rate estate for up to 36 months after the death. A testamentary trust for a beneficiary who qualifies for the disability tax credit can elect to be a qualified disability trust. People aged 65 or older can set up an alter ego trust for themselves, or a joint spousal or common-law partner trust for a couple, in which only the settlor, or the couple, can receive income or capital while alive.

Families use trusts for a range of reasons. Parents may leave money in trust so a child receives it in stages rather than all at once at the age of majority. A trust can manage money for an adult who cannot handle it, including a person with a disability whose provincial benefits could be affected by a direct inheritance. Older Canadians sometimes use alter ego and joint spousal trusts to hold assets outside their estate, which can reduce probate costs in some provinces and keep the details private. Business owners use family trusts to hold shares in a private company, although federal rules on the tax on split income, in force since 2018, sharply limit the tax savings from paying dividends to family members who are not active in the business.

The tax treatment depends on where income ends up. Income a trust pays or makes payable to a beneficiary in a year can generally be deducted by the trust and taxed in the beneficiary’s hands instead. Income that stays in most trusts is taxed at the top federal rate, which is 33 per cent, plus the provincial top rate, with no graduated brackets. Graduated rate estates and qualified disability trusts are the main exceptions and pay the same graduated rates as individuals. Most personal trusts also face a deemed sale of their capital property every 21 years under the Income Tax Act, which can trigger tax on accumulated gains even if nothing is sold. Our guide to Canada’s 2026 federal and provincial tax brackets lists the top rates by province.

Reporting rules have tightened. Under the enhanced trust reporting rules, most express trusts resident in Canada must file a T3 return every year even if they earned no income, and must disclose the names and details of settlors, trustees, beneficiaries and anyone who can control trustee decisions on Schedule 15. Some trusts are exempt as listed trusts, including trusts that have existed for less than three months and trusts whose assets stayed at or below $50,000 throughout the year. A trust with only individual trustees and beneficiaries related to them can qualify with up to $250,000 in certain assets, according to the CRA’s frequently asked questions on the enhanced rules, updated Oct. 5, 2026.

Bare trusts, in which a person holds legal title to property for someone else who controls it, such as a parent on the title of an adult child’s home, have been given repeated reprieves. The CRA did not require them to file for 2024 and 2025 year-ends. Reportable bare trusts become subject to the rules for taxation years ending on or after Dec. 31, 2026, the CRA said, with exceptions that include joint ownership where every legal owner is also a beneficiary and certain arrangements involving a family home. For a trust with a calendar year-end, the T3 return is due 90 days after the end of the year, which makes the first deadline for affected bare trusts March 31, 2027. Penalties can apply for late or missing returns.

Setting up a trust involves legal fees, ongoing accounting and annual filings, so it is not the right tool for every family. Because the rules depend on the type of trust, the province and the people involved, anyone considering one should check their own situation with a qualified lawyer, accountant or estate planner.

If you find reporting like this useful, consider supporting Canada News Media, an independent Canadian newsroom with no corporate parent.