Family Trusts in Canada (2026): Who Actually Needs One

Family trusts were once the workhorse of Canadian tax planning for higher-income families. Then the 2018 TOSI (Tax on Split Income) rules changed everything. Most family trusts set up before 2018 are no longer worth their administration cost; new ones are set up much more selectively. Here’s where they still make sense.

What a family trust is

A family trust is a legal arrangement where one or more people (settlors) transfer assets to trustees, who hold and manage the assets for the benefit of named beneficiaries. The structure has three roles:

• Settlor — creates the trust; typically funds it with a nominal amount initially
• Trustees — manage the assets, decide on distributions; usually parents
• Beneficiaries — the people who can receive distributions; typically spouse, children, and sometimes grandchildren or future descendants

Most family trusts are DISCRETIONARY — meaning the trustees decide each year which beneficiaries receive how much, with full flexibility. They’re also IRREVOCABLE — you can’t take assets back once they’re in the trust.

The pre-2018 golden era of income splitting

Before 2018, the typical family-trust play looked like this:

1. Business owner sets up a family trust that owns shares of their operating company
2. Operating company pays dividends to the family trust
3. Trust distributes those dividends to adult kids (often 18-25, in university with no other income)
4. Kids pay tax at their very low marginal rate, often $0 thanks to basic personal amount + tuition credits
5. Family saves tens of thousands annually in tax

It was perfectly legal — and very common among small-business families. CRA didn’t love it but couldn’t shut it down without changing the rules.

What TOSI did (2018)

The Tax on Split Income (TOSI) rules introduced in 2018 effectively eliminated this strategy. Now, dividends paid to family members who aren’t “actively involved” in the business (or who don’t meet certain exception criteria) are taxed at the TOP marginal rate — typically 33%+ at the federal level alone — regardless of the recipient’s actual income level.

Exceptions exist for:

• Spouses of business owners 65+
• Family members who work in the business 20+ hours/week on average
• Family members who own 10%+ of a non-services business with substantial non-related-business income
• Recipients receiving “reasonable returns” on capital contributions

Without one of those exceptions, distributing dividends to family members through a family trust gains you nothing tax-wise.

Where family trusts still make sense in 2026

1. Estate freezes for business succession

The most enduring use case. You “freeze” your ownership in the family business at today’s value (taking back preferred shares), and the family trust receives new common shares that capture all FUTURE growth. When the business is eventually sold or you die, the post-freeze growth has been accumulating in the trust’s hands — outside your estate — limiting your final tax bill and creating an inheritance vehicle for kids.

2. Holding life insurance proceeds for beneficiaries

If you have minor children or beneficiaries who aren’t financially mature, a family trust can receive life insurance payouts on your death and distribute funds gradually rather than handing a 19-year-old $500K in one shot. Controls bad decisions, manages tax efficiency, protects against creditors and divorce.

3. Holding family cottage for multiple generations

Cottage in a family trust avoids the capital gains tax that would otherwise be triggered every time the property transfers between generations. But the 21-year deemed disposition rule still applies — see our 21-year rule guide for the planning that’s needed.

4. Disability-related Henson trusts

A specific type of family trust for beneficiaries with disabilities. Lets them receive inheritance without losing provincial disability benefits (ODSP, AISH, etc.). Discretionary distributions mean the assets aren’t legally “theirs” for benefit-calculation purposes.

The costs and obligations

• Setup: $4,000-$10,000 in legal fees
• Annual T3 trust return: $1,500-$4,000 in accounting fees
• 21-year deemed disposition tax bill: can be tens or hundreds of thousands of dollars
• New 2023 reporting requirements: trusts must now report beneficial ownership annually (Form T3SCH15), even if the trust didn’t generate income

If a family trust isn’t saving you at least $10K/year in tax + estate planning value, the administration overhead probably exceeds the benefit. Many family trusts set up in the 2000s have been collapsed since TOSI because they no longer pay for themselves.

The honest test

Before setting up a family trust, ask: do I have an active business that’s growing rapidly? Do I have multiple beneficiaries with significantly different tax situations who aren’t TOSI-affected? Is my estate large enough ($2M+) that probate + tax savings justify the ongoing administration? If you can’t answer yes to at least one, you probably don’t need one.