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Trust Law/Level VIII · Trusts of the world/8.1 Common-law systems/Lesson 3

Canada and Australia

How trusts work in Canada, including Quebec’s civil-law trust and the federal 21-year rule, and in Australia, where discretionary family trusts are common.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Canada: before a trust’s 21st anniversary, distribute capital property to Canadian-resident beneficiaries at the trust’s tax cost (ITA s.107(2)), deferring the s.104(4) deemed disposition. Catch: the rollover is generally denied for non-resident beneficiaries (s.107(5)), so their shares can trigger tax now.
  2. Canada: a settlor aged 65 or older can move capital property into an alter ego trust at tax cost (ITA s.73(1.01)), with no 21-year deemed disposition until the settlor’s death. Catch: when filing is required, the T3 is due within 90 days after year-end.
  3. Canada: for years ending on or after 31 December 2025, a trust holding assets of no more than $50,000 throughout the year is a ‘listed trust’ that skips Schedule 15 beneficial-ownership reporting (ITA s.150(1.2)). Catch: a trust with taxable income still files its T3.
  4. Australia: a testamentary trust lets estate-derived income reach minors at adult rates, including the $18,200 tax-free threshold, instead of penalty rates reaching 45% above $1,307. Catch: assets acquired on or after 1 July 2019 unrelated to the estate lose that treatment.
  5. Australia: a family trust can stream income to adult beneficiaries and pass on the 50% CGT discount for assets held 12 months, if the trustee resolves present entitlement by 30 June. Catch: an ineffective resolution can leave the trustee taxed at the top rate.

MaterialsIncome Tax Act (Canada) sections 104 and 107, free on the Justice Laws websiteCivil Code of Québec articles 1260 to 1298 on the trust, free on LegisQuébecThe Australian Taxation Office’s ruling TR 2022/4 and guideline PCG 2022/2 on section 100A, free on the ATO legal databaseLesson 4.1.7, on government benefit trusts beyond the US, for Australian special disability trusts

Wonder

  1. How can a Quebec trust exist if none of the parties owns the trust property?
  2. Why does Canadian tax law treat a long-lived trust as if it sold its assets every 21 years?
  3. Why does the Australian Taxation Office pay close attention to how discretionary trusts distribute income?

Explore

  1. In Canada, trust law is mainly provincial. Each common-law province has its own trustee statute, such as Ontario’s Trustee Act, which sets default powers and a prudent investor standard; details differ by province. Income tax, by contrast, is federal and applies across the country. Under the Income Tax Act, a trust is treated as an individual for income tax purposes (s.104(2)), and the Canada Revenue Agency administers trust returns. This lesson describes how the systems in Canada and Australia work and does not suggest any structure.
  2. Subsection 104(4) of the Income Tax Act deems most trusts to dispose of their capital property, other than depreciable property, and certain inventory land at fair market value on the 21st anniversary of the trust and every 21 years after, and to reacquire it at that value. Accrued gains are therefore taxed even though nothing was sold. For spousal or common-law partner trusts, alter ego trusts and joint partner trusts, the first deemed disposition generally occurs on the death of the settlor or of the surviving spouse or partner instead. Under s.107(2), a personal trust can generally distribute property to a beneficiary at its tax cost, deferring the gain, but s.107(5) generally denies this rollover for non-resident beneficiaries.
  3. Quebec follows the civil law, and its Civil Code treats the trust differently. Under article 1260, a trust results from an act by which a settlor transfers property from his patrimony to another patrimony that he constitutes and appropriates to a particular purpose, and which a trustee undertakes to hold and administer. Article 1261 makes this trust patrimony a ‘patrimony by appropriation’, autonomous and distinct from those of the settlor, the trustee and the beneficiary, in which none of them has a real right. The trust is not a legal person; the trustee has control and exclusive administration of the trust patrimony (art. 1278). The Code recognises personal trusts and trusts for private or social utility (art. 1266).
  4. In Australia, trust law is also largely state-based. Each state and territory has its own trustee statute, such as the Trustee Act 1925 (NSW) and the Trustee Act 1958 (Vic), setting default powers, investment rules and court supervision; details differ between jurisdictions. Professional trustee companies, which act as executors and trustees for the public, are regulated nationally under Chapter 5D of the Corporations Act 2001 (Cth) and supervised by the Australian Securities and Investments Commission (ASIC). Federal tax law then applies to all trusts.
  5. Discretionary trusts, often called ‘family trusts’, are widely used in Australia to hold family investments or businesses. The trustee decides, within a class of beneficiaries defined by the deed, who receives income, and beneficiaries who are presently entitled are generally taxed on their shares. In tax law, ‘family trust’ also has a narrower meaning: a trust whose trustee has made a family trust election under Schedule 2F of the Income Tax Assessment Act 1936. The election affects matters such as the trust loss rules and franking credits, and distributions outside the family group can then attract family trust distribution tax. A letter of wishes may guide the trustee but generally does not bind it.
  6. The Australian Taxation Office (ATO) has focused on section 100A of the Income Tax Assessment Act 1936. It can apply where a beneficiary is made presently entitled to trust income under a ‘reimbursement agreement’ and someone else in fact benefits; the trustee is then taxed on that income at the top rate instead. In December 2022 the ATO finalised Taxation Ruling TR 2022/4 and Practical Compliance Guideline PCG 2022/2 on how it applies the section, including its exclusion for agreements made in the course of ordinary family or commercial dealing. Australia also has special disability trusts under Part 3.18A of the Social Security Act 1991, covered in lesson 4.1.7.

Key facts

  • In Canada, trust law is mainly provincial, but income tax on trusts is federal under the Income Tax Act.
  • Income Tax Act (Canada) s.104(4) deems most trusts to dispose of capital property at fair market value every 21 years; spousal, alter ego and joint partner trusts start from a death instead.
  • Under Civil Code of Québec art. 1261, a trust patrimony is a patrimony by appropriation, autonomous and distinct, in which the settlor, trustee and beneficiary have no real right.
  • Australian trust law is largely state-based, as in the Trustee Act 1925 (NSW); trustee companies are regulated nationally under Chapter 5D of the Corporations Act 2001.
  • In Australian tax law, a ‘family trust’ is a trust that has made a family trust election under Schedule 2F of the Income Tax Assessment Act 1936.
  • The ATO’s TR 2022/4 and PCG 2022/2, finalised in December 2022, set out its view of section 100A of the Income Tax Assessment Act 1936.

Exercise nine, six, three, one

9CollectList up to 9 features of Canadian or Australian trusts described in this lesson or in an official source you are reading (some sources give fewer), such as who holds the property, how income is taxed, when a deemed disposition occurs and who regulates the trustee.
6ClusterSort them into 6 categories: Canadian common-law provinces, Quebec, Canadian federal tax, Australian state law, Australian federal tax, and facts you are unsure about.
3DistillReduce the 6 categories to 3 groups: features about who owns or controls trust property, features about how trusts are taxed, and features about who regulates trustees.
1CrystallizeWrite 1 sentence explaining, in your own words, how a Quebec trust patrimony differs from a common-law trust in which the trustee holds legal title.

Fact check

Dates, figures and claims checked against the published sources listed below.

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