Trust and Estate Tax Planning for CCPC Owners — Mississauga CPA Firm

The 2018 TOSI rules significantly restricted income splitting through family trusts, but did not eliminate it. Whether income distributed through a trust is subject to TOSI depends on whether the recipient qualifies under one of the available exclusions.

The most commonly applicable exclusions for adult family members in an operating CCPC context are: the excluded business exclusion (the recipient worked 20+ hours per week in the business in the current or any prior year); the excluded shares test (the corporation meets specific criteria and the trust's shareholding does not exceed 10%); and the arm's-length capital test for individuals who provided capital to the corporation at risk.

Capital gains allocated from a family trust to adult beneficiaries on a qualifying QSBC share sale are not subject to TOSI — making LCGE multiplication through a family trust one of the most valuable income splitting strategies still fully available after 2018. We conduct a written TOSI analysis before any distribution plan is implemented.

Under Section 104(4) of the Income Tax Act, most inter vivos family trusts are deemed to dispose of all capital property at fair market value on their 21st anniversary — and every 21 years thereafter. This triggers capital gains inside the trust, taxed at the top marginal rate of 53.53% in Ontario. The LCGE is not available to a trust on a deemed disposition.

For a family trust holding common shares of a successful CCPC after an estate freeze, the 21-year exposure can be substantial — running into hundreds of thousands of dollars — if the business has grown significantly.

Planning options include: distributing shares to adult beneficiaries before the 21-year anniversary under Section 107(2) (where the trust has sufficient ACB in the shares); executing a qualifying share sale before year 21 that allocates gains to beneficiaries for their LCGE claims; or executing a new estate freeze at the 21-year mark to lock in the current value and restart the clock. Planning should begin no later than year 10 — options available at year 10 are materially different from those available at year 20.

When a discretionary family trust holds common shares of a qualifying CCPC and the corporation's shares are sold in a qualifying transaction, the capital gain can be allocated to individual adult beneficiaries — each of whom can then claim their own individual LCGE of $1,275,000 in 2026.

For example: a family trust holds shares of a CCPC that is sold for $4,000,000 (with nominal ACB). The trust allocates $1,275,000 of capital gains to the owner, $1,275,000 to a spouse, and $1,275,000 to an adult child — each claiming their LCGE. Total LCGE shelter: $3,825,000. Combined tax saving at Ontario's top marginal rate on capital gains (26.77%): approximately $1,023,000.

For the LCGE multiplication to work: each beneficiary must be a Canadian resident; the shares must qualify as QSBC shares; the trust must have held the shares for at least 24 months; and the TOSI rules must not apply to the capital gain allocation (TOSI does not apply to qualifying QSBC capital gains).

Yes — under the enhanced trust reporting rules in effect from the 2023 taxation year onward, most inter vivos family trusts must file a T3 return annually, even if the trust had no income for the year.

The T3 return must include Schedule 15 (Beneficial Ownership Information), disclosing the name, address, date of birth, jurisdiction of residence, and SIN of each trustee, beneficiary, settlor, and anyone with the ability to influence trustee decisions.

The T3 filing deadline is 90 days after the trust's taxation year-end. Penalties for late filing are severe: a gross negligence penalty of 5% of the trust's maximum fair market value during the year — with a minimum of $2,500 — for intentional or careless failures to file Schedule 15. These penalties are materially higher than typical late-filing penalties and reflect the government's strong commitment to beneficial ownership transparency.

If your trust has not been filing T3 returns, contact us immediately — late filing exposure can be significant.

A Graduated Rate Estate (GRE) is an estate that qualifies under the Income Tax Act to be taxed at graduated personal income tax rates — rather than the flat top marginal rate that applies to most trusts — for up to 36 months after the date of death.

The GRE designation is valuable because: (1) graduated rates are materially lower than the top marginal rate (53.53% in Ontario) on amounts up to the higher bracket thresholds; (2) only a GRE can elect to apply capital losses realized in the estate's first taxation year back to the terminal T1 return under Section 164(6); and (3) the proposed extended carryback rules under the 2024 proposed amendments would allow capital losses in any of the first three GRE taxation years to be carried back.

To qualify as a GRE, the estate must designate itself in its first T3 return. This designation is irrevocable and time-sensitive — missing it in the first T3 return permanently forecloses GRE status for that estate.

A properly structured family trust can provide creditor protection for trust assets in certain circumstances — but this protection is not automatic and has significant limitations.

Trust assets held by a trustee who is genuinely independent of the settlor are generally not available to satisfy the settlor's personal creditors, provided the transfer to the trust was not made with intent to defraud creditors (fraudulent conveyance rules apply under both provincial and federal insolvency legislation). Assets transferred when existing debts were in place or while insolvent are at heightened risk of challenge.

Practically, CCPC owners use the combination of a holding company and a family trust to separate retained earnings and future business growth from operating company creditor exposure. After-tax profits flow from the operating CCPC to the holdco as tax-free intercorporate dividends, and holdco common shares held by the family trust are outside the reach of the operating company's creditors in the normal course.

Creditor protection through trusts is ultimately a legal question as much as a tax question — we work alongside your corporate counsel to ensure the structure achieves both tax and protection objectives.

Section 75(2) of the Income Tax Act attributes income and capital gains from trust-held property back to the person who transferred the property to the trust (the settlor) if that person remains a beneficiary of the trust or if the property can revert to the transferor or pass to persons designated by the transferor.

This is a common trap in family trust structures: if the CCPC owner (as settlor) retains any ability to receive trust distributions as a beneficiary, all income and capital gains generated by trust-held property — including CCPC dividends and capital gains on share sales — are attributed back to the settlor and taxed in their hands at the top marginal rate, defeating the income splitting purpose entirely.

The standard approach to avoiding Section 75(2) attribution is to have the trust deed drafted so that the settlor is not a beneficiary and retains no reversionary rights over the contributed property. The initial contribution to the trust is typically a nominal amount from a third party, with the CCPC shares subscribed for by the trust directly after the estate freeze rather than transferred from the settlor.

We review Section 75(2) exposure in every existing trust engagement and structure new trusts to avoid attribution from the outset.

An inter vivos trust is created during the settlor's lifetime — a family trust used for CCPC planning is always an inter vivos trust. It takes effect immediately and is subject to the 21-year rule.

A testamentary trust is created by a will and comes into existence on death. The estate itself is a testamentary trust during administration. Testamentary trusts established in a will for the benefit of specific beneficiaries (such as minor children or a surviving spouse) can be structured as GREs or spousal trusts with favourable tax treatment. Unlike inter vivos trusts, testamentary trusts are not subject to the 21-year deemed disposition rule — their deemed disposition occurs on the death of the relevant life interest holder.

For CCPC planning purposes, the distinction matters primarily when deciding whether to hold shares in a family trust established during the owner's lifetime (inter vivos) or to structure share transfers through the will (testamentary). Both approaches have planning applications, and the right structure depends on the owner's specific succession objectives and the corporate structure in place.

Our engagement depends on your specific situation and objectives, but typically covers one or more of the following:

For a new family trust: written tax plan with ITA references; TOSI analysis for each proposed beneficiary; 21-year planning calendar; coordination with corporate counsel on trust deed drafting; and T3 compliance setup.

For an existing family trust: review of the current structure against TOSI rules (particularly if established before 2018); 21-year clock assessment and planning options; Schedule 15 compliance review; and integration with any planned share sale or succession event.

For post-death estate planning: GRE designation in the first T3 return; integration with post-mortem tax planning (pipeline, loss carryback, CDA); T3 preparation for the duration of the estate's administration.

Every engagement begins with a no-charge scoping call. We confirm whether the situation is within our scope, what information we need, and the estimated fixed fee before any work begins.