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Subsection 104(4) of the Income Tax Act (Canada) (the "Tax Act") sets out a special deemed disposition rule for trusts (the "21-Year Rule"). Generally, the Rule provides that at the end of the day that is 21 years after the creation of a trust, the trust is deemed to have disposed of its capital property and any land included in the inventory of a business of the trust for proceeds equal its to fair market value. The trust is then deemed to have re-acquired its property immediately thereafter for an amount equal to the fair market value of the property. The 21-Year Rule effectively forces trusts to recognize and pay tax on accrued capital gains every 21 years, thereby preventing an indefinite deferral of tax.
Subsection 104(5.8) of the Tax Act is an anti-avoidance rule that targets avoidance of the 21-Year Rule via trust-to-trust transfers. Subsection 104(5.8) provides that a transferee trust is deemed to inherit a transferor trust's "disposition day". Thus, the 21-Year Rule cannot be avoided by transferring property from one trust to another.
Budget 2025 takes aim at certain tax avoidance planning techniques that have been employed to transfer trust property indirectly to a new trust to avoid both the 21-Year Rule and the anti-avoidance rule in subsection 104(5.8) of the Tax Act.1 In other words, Budget 2025 targets "planning that seeks to do indirectly what cannot be done directly."2 Such planning may involve, for example, a transfer of trust property on a tax-deferred basis to a beneficiary that is a corporation owned by a new trust.
Budget 2025 proposes to amend the preamble of subsection 104(5.8) so that the anti-avoidance rule captures transfers from one trust to another that occur "directly or indirectly in any manner whatever"3:
(5.8) Where capital property, land included in inventory, Canadian resource property or foreign resource property is transferred, directly or indirectly in any manner whatever, at a particular time by a trust (in this subsection referred to as the "transferor trust") to another trust (in this subsection referred to as the "transferee trust") in circumstances in which subsection 107(2) or 107.4(3) or paragraph (f) of the definition disposition in subsection 248(1) applies,
Any transferee trust that receives property from another trust directly or indirectly in any manner would therefore be deemed to inherit the transferor trust's "disposition day".
Curiously, Budget 2025 predicts that the revenue impact of the proposed amendment is nil, small, or indeterminable.4 If passed, the proposed amendment would take effect as of "Budget Day", (i.e., on November 4, 2025).5
Footenotes
1. Government of Canada, "Budget 2025: Canada Strong", (November 4, 2025), [Budget 2025], pp 343-344.
2. Budget 2025, pp 343-344.
3. Budget 2025, p 387 "Notice of Ways of Means Motion to amend the Income Tax Act and Income Tax Regulations".
4. Budget 2025, p 336.
5. Budget 2025, p 387 "Notice of Ways of Means Motion to amend the Income Tax Act and Income Tax Regulations".
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2025
