Common Trust Issues in 2025: Insights for Canadian CPAs

Trusts are a powerful tool in tax planning, but they come with a host of complexities that can lead to significant issues if not properly managed. At Cadesky Tax, we’ve encountered these challenges firsthand, and our seminar, Trusts: Common Problems and How to Fix Them, is designed to help professionals navigate these pitfalls. Below, we explore three of the most common trust issues in Canadian tax and provide practical insights for CPAs.


1. Income Allocation and Taxation

One of the most frequent issues with trusts is the failure to properly allocate income to beneficiaries by the end of the trust’s taxation year (typically December 31). If income is not paid or made payable to beneficiaries, it remains taxable in the trust, often at the top marginal tax rate. This can lead to missed opportunities for income splitting, the inability to claim the capital gains exemption, and potential exposure to the Alternative Minimum Tax (AMT).

Key Considerations:

  • Timing: Subsection 104(24) of the Income Tax Act requires that income be paid or made payable by year-end. Trustee resolutions should be passed in advance, even if the exact amounts are not yet finalized.
  • Documentation: Beneficiaries must be informed of amounts made payable, and promissory notes can be used as evidence. However, these notes should not remain outstanding long-term.
  • Nature of Income: Proper designations are critical to ensure the income retains its character (e.g., capital gains, dividends) when allocated to beneficiaries.

Solution: CPAs should work with trustees to estimate income in November or December, pass resolutions, and document allocations. This proactive approach minimizes the risk of income being taxed in the trust.


2. Attribution Rules and Reversionary Trusts

Attribution rules under the Income Tax Act can create significant complications, particularly when property contributed to a trust reverts to the settlor or when income is attributed back to the contributor. Subsection 75(2) is a key provision that applies when the settlor retains control over the trust property or is a capital beneficiary.

Common Scenarios:

  • Spousal Attribution: Income and capital gains distributed to a spouse may attribute back to the contributor.
  • Minor Beneficiaries: Income (but not capital gains) distributed to minor children can attribute to the contributor.
  • Reversionary Trusts: If the settlor is a trustee or retains control, all income and gains may attribute back to them.

Solution: While attribution issues are difficult to eliminate, they can often be minimized. For example:

  • Allocate capital gains to beneficiaries not subject to attribution.
  • Restructure the trust to remove the settlor as a trustee or beneficiary.
  • Use prescribed-rate loans to fund the trust, ensuring interest is paid annually to avoid attribution.


3. The 21-Year Rule

The 21-year rule, which deems a trust to dispose of its assets at fair market value every 21 years, is a significant challenge for long-term trusts. Without proper planning, this can result in substantial tax liabilities.

Key Issues:

  • Deemed Disposition: Trusts holding appreciated assets face a deemed capital gain, which is taxable in the trust.
  • Rollout Restrictions: If subsection 75(2) has ever applied, the trust may be unable to roll out assets to beneficiaries on a tax-deferred basis.

Planning Strategies:

  • Rollouts: Distribute appreciated assets to Canadian-resident beneficiaries before the 21-year anniversary to avoid the deemed disposition.
  • Pipeline Planning: Allow the deemed gain to occur, then transfer assets to a holding company in exchange for a note. The note can be paid off gradually, allowing retained earnings to be extracted at capital gains rates.
  • Vesting: Vest trust interests in beneficiaries, subject to conditions such as age, to enable future rollouts.


Final Thoughts

Trusts are inherently complex, and their dynamic nature often leads to unforeseen issues. For CPAs, understanding these common problems and implementing proactive solutions is essential to managing client trusts effectively. Our seminar, Trusts: Common Problems and How to Fix Them, provides a comprehensive guide to identifying and addressing these challenges, ensuring that trusts remain a valuable tool in tax planning.

By anticipating potential pitfalls and applying the right strategies, CPAs can help their clients navigate the complexities of trust taxation with confidence. For more information or to attend our seminar, visit Cadesky Tax Seminars.