Holding Real Estate in a Trust in Canada: Pros & Cons Holding Real Estate in a Trust in Canada: Pros & Cons

Every second real estate investor I talk to asks me about trusts. Usually it goes something like: “My accountant mentioned a trust. Should I set one up?”

And my answer is always the same: maybe. It depends.

Trusts are powerful tools. But they’re also expensive, complex, and misunderstood. I’ve seen investors spend $10,000 setting up a trust that gave them zero benefit because their situation didn’t call for one. I’ve also seen investors save $200,000 in taxes because they set up the right trust at the right time.

This article will help you figure out which camp you’re in.

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What Is a Trust, Really?

Strip away the legal jargon and a trust is pretty simple. It’s a relationship where one person (the settlor) transfers property to another person (the trustee) to hold and manage for the benefit of someone else (the beneficiary).

The trustee legally owns the property. The beneficiary gets the benefit of it. The settlor is the one who set the whole thing up.

In the real estate world, this means a trust can own rental properties. The trustee manages them. The beneficiaries receive the income or eventually receive the properties.

There are two main types of trusts that matter to Canadian real estate investors.

Inter Vivos Trusts (Living Trusts)

An inter vivos trust is created while you’re alive. You transfer property or cash into the trust, appoint trustees, and name beneficiaries.

For real estate investors, the most common use is a family trust. You set it up with your children (and possibly spouse) as beneficiaries. The trust holds rental properties or shares in a corporation that holds rental properties.

What a Family Trust Can Do

Income allocation. The trustee can distribute income to different beneficiaries each year. If one child has a low income year, more rental income can be allocated to them at a lower tax rate.

Probate avoidance. Assets in the trust don’t form part of your estate when you die. They pass to beneficiaries according to the trust terms without going through probate court. On a $2 million portfolio in Ontario, that saves roughly $29,500 in probate fees alone.

Asset protection. Property held in a properly structured trust is generally protected from beneficiaries’ creditors. If your child goes through a divorce or bankruptcy, the trust property is typically shielded.

Control. You can be a trustee (along with others) and maintain control over how the property is managed, when income is distributed, and when property is eventually transferred to beneficiaries.

Estate freeze. A family trust is often the vehicle that holds the new common shares in an estate freeze. The growth accrues to the trust for the benefit of your children, and you retain your frozen preferred shares.

What a Family Trust Cannot Do (Anymore)

Before 2018, family trusts were incredible income-splitting machines. You could allocate rental income to your adult children, your spouse, or other family members, and they’d pay tax at their own marginal rate. A family with a trust could spread $100,000 in rental income across four family members and pay dramatically less tax than one person reporting the full amount.

Then the Tax on Split Income (TOSI) rules changed everything.

Since January 1, 2018, income allocated from a trust to adults who aren’t actively involved in the business is taxed at the top marginal rate (around 53% in Ontario) regardless of their actual income level. This is called the “kiddie tax” and it now applies to adults too.

There are exceptions. If your adult child works at least 20 hours per week in the business, or if they’re 25 or older and own at least 10% of a corporation that is not a professional services business, the TOSI rules may not apply. But for most family trusts holding passive rental properties, the income-splitting benefit has been gutted.

This is the single biggest reason why trusts aren’t the slam dunk they used to be.

The 21-Year Rule: The Ticking Clock

Here’s the rule that catches everyone off guard.

Every 21 years, a trust is deemed to have disposed of all its assets at fair market value. Just like deemed disposition at death, except the trust doesn’t need to die. It’s an automatic tax trigger.

If your family trust holds rental properties that have appreciated significantly over 21 years, the tax bill can be massive.

Let’s say you transferred a property worth $400,000 into a trust in 2005. By 2026 (21 years later), that property is worth $900,000. The trust triggers a $500,000 capital gain. Assuming the trust pays tax at the top marginal rate (trusts are taxed at the highest personal rate on undistributed income), that’s roughly $132,000 to $165,000 in tax.

And the clock resets. Another 21 years, another deemed disposition.

Planning Around the 21-Year Rule

You have several options as the 21-year anniversary approaches:

Distribute the property to beneficiaries before the 21-year mark. This can be done on a tax-deferred basis (a rollout). The beneficiary takes the property at the trust’s cost base. No immediate tax hit. But now the beneficiary owns the property personally, losing the trust’s protection and control benefits.

Sell the property and distribute the cash. If you’re going to trigger a gain anyway, sometimes it’s better to sell, pay the tax, and distribute the after-tax proceeds.

Transfer to a new trust. This is complicated and CRA scrutinizes it heavily. You can’t just roll assets into a new trust to restart the clock without consequences.

Transfer to a corporation. The trust can transfer property to a corporation using a Section 85 rollover, potentially deferring the gain. The corporation doesn’t have a 21-year rule.

The key takeaway: if you set up a trust, you need to be planning for the 21-year mark from day one. Not 20 years in when it’s too late for the best strategies.

Testamentary Trusts

A testamentary trust is created through your will. It only comes into existence after you die.

The biggest advantage of testamentary trusts used to be that they were taxed at graduated rates (like an individual), not at the top marginal rate. This made them excellent income-splitting tools for estate planning.

Since 2016, only Graduated Rate Estates (GREs) and Qualified Disability Trusts (QDTs) get graduated rates. A GRE only lasts for 36 months after death. After that, any testamentary trust is taxed at the top marginal rate on retained income.

So testamentary trusts are less powerful than they used to be. But they still serve important purposes:

Minor beneficiaries. If your children are young when you die, a testamentary trust can hold and manage properties for them until they’re old enough to handle it. You can set conditions: income distributed for education, capital distributed at age 25, full distribution at age 30. Whatever makes sense.

Spendthrift protection. If you have a beneficiary who isn’t great with money (it happens), a testamentary trust ensures they benefit from the property without having full control to sell it and blow the proceeds.

Second marriage situations. If you want your spouse to benefit from the property during their lifetime, but ultimately want it to go to your children from a first marriage, a testamentary trust accomplishes this cleanly.

Disabled beneficiaries. A Qualified Disability Trust provides graduated tax rates and protects provincial disability benefits.

The Real Costs of Running a Trust

Trusts aren’t free. Before you set one up, understand the ongoing costs:

For a trust holding $500,000 in real estate, you might be spending $3,000 to $5,000 annually just to maintain the structure. Over 21 years, that’s $63,000 to $105,000 in costs before any tax savings.

If the trust isn’t saving you at least that much in probate fees, tax, and asset protection, it’s not worth it.

When a Trust Makes Sense

Based on my experience working with investors, here are the situations where a trust genuinely makes sense:

You have a large portfolio (over $2 million in equity) and you’re doing an estate freeze. The family trust is the natural vehicle to hold the new common shares. The probate savings alone can justify the cost in high-fee provinces like Ontario, BC, and Nova Scotia.

You have minor children and want to protect assets for them. A trust ensures the assets are managed by trustees you choose until your children are mature enough to handle them.

You have a blended family. Trusts provide the control needed to balance the interests of a current spouse with children from a prior relationship.

You have a beneficiary with a disability. A Qualified Disability Trust provides both tax benefits and protection of government benefits.

You have a beneficiary who shouldn’t control large assets directly. Whether due to addiction, poor financial habits, or vulnerability to influence, a trust protects both the assets and the beneficiary.

When a Trust Doesn’t Make Sense

Your portfolio is small. If you own one or two properties with modest equity, the costs of a trust will likely exceed the benefits. A properly drafted will with powers of attorney may be all you need.

Your primary motivation is income splitting. Post-TOSI, the income splitting benefits of trusts are severely limited for passive rental income. If that’s your only reason, it probably won’t work.

You’re in a low-probate province. If you’re in Alberta (max $525 in probate fees) or Quebec (minimal fees for notarial wills), the probate avoidance benefit of a trust is negligible.

You want simplicity. Trusts add complexity to everything: tax returns, property transfers, mortgage applications, banking, and insurance. If you value simplicity and the tax savings aren’t substantial, skip it.

You don’t want to pay ongoing costs. If the annual $3,000+ in accounting and legal fees bothers you, a trust isn’t right for you. Underfunding the professional support for a trust leads to mistakes that cost far more than the fees.

Trusts and Mortgage Financing

Here’s a practical issue that often gets overlooked: getting a mortgage in a trust can be difficult.

Most institutional lenders (the big banks) don’t lend to trusts. You’re typically looking at credit unions, private lenders, or creative structuring where the trust holds shares in a corporation and the corporation holds the mortgage.

If you’re planning to finance property purchases through a trust, discuss this with your mortgage broker before setting anything up. The financing structure needs to work, or the trust becomes impractical.

This is one reason many investors prefer the corporate structure: corporations can get mortgages more easily than trusts, even though the rates and terms may differ from personal mortgages.

Setting Up a Trust: The Process

If you’ve decided a trust makes sense, here’s what to expect:

Step 1: Consult with both a tax accountant and an estate lawyer who have experience with trusts. Don’t use a general practitioner lawyer for this.

Step 2: Define the trust terms: who are the beneficiaries, who are the trustees, what powers do the trustees have, when and how is income distributed, what happens when a beneficiary dies, and what’s the plan for the 21-year mark.

Step 3: The lawyer drafts the trust deed. This is a detailed document that governs everything about the trust. Review it carefully. Ask questions. Make sure you understand every provision.

Step 4: The trust is settled (created) with a nominal amount (usually $100) by someone other than you (to avoid attribution issues, the settlor shouldn’t also be a beneficiary or trustee in many cases). This is a technical requirement that your lawyer will handle.

Step 5: Transfer property or shares to the trust. This needs to be done with proper tax planning to avoid or defer any gains triggered by the transfer.

Step 6: Set up the trust’s CRA accounts, banking, and record-keeping systems. The trust is a separate taxpayer with its own obligations.

Step 7: File annual T3 returns and keep meticulous records. Missing a T3 filing results in penalties, and trusts are subject to new reporting requirements that took effect in recent years.

New Trust Reporting Rules

Since 2023, trusts have expanded reporting obligations. Most trusts must now file a T3 return annually, even if they have no income. The return must disclose the identity of all trustees, beneficiaries, and settlors.

This means your trust is no longer private in the way it once was. CRA knows who’s involved. This doesn’t change the tax benefits, but it eliminates any privacy advantage trusts may have had.

Failure to file can result in penalties of $25 per day, to a minimum of $100 and maximum of $2,500. More importantly, gross negligence penalties can reach 5% of the highest fair market value of property held by the trust during the year. On a trust holding $1 million in real estate, that’s a potential $50,000 penalty.

Take the reporting requirements seriously.

Final Thoughts

Ready to explore your financing options? Book a free strategy call with LendCity™ and let our team help you find the right path forward.

Trusts are like power tools. In the right hands, for the right job, they’re incredibly effective. In the wrong situation, they’re expensive, complicated, and can actually make things worse.

Don’t set up a trust because someone told you it’s a good idea. Set one up because you and your professional team have analyzed your specific situation and determined that the benefits clearly outweigh the costs and complexity.

And if you do set one up, fund the ongoing professional support it needs. A neglected trust is worse than no trust at all.

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