21-year deemed disposition rule

21-year deemed disposition rule generally deems trusts to have disposed of and reacquired their trust property every 21 years at their fair market values. The trusts are subject to income taxes on accrued capital gains, income, or recapture

Were it not for the 21-year deemed disposition rule, trust property could be passed from generation to generation on a tax-free basis. 

The 21-year deemed disposition rule was enacted in 1972, the year tax on capital gain was introduced.

Property subject to the 21-year deemed disposition rule includes:

  • Marketable securities;
  • Real and appreciable property;
  • shares of a qualified small business corporation;
  • qualified farm property;
  • qualified fishing property;
  • Personal-use and listed-personal properties
  • Canadian and foreign resource properties; and
  • Land held as inventory.

21-year deemed disposition rule not only applies to Canadian trusts but also to foreign trusts that own specific types of Canadian property. Certain types of trusts, such as unit trusts, employee profit sharing plans, registered education savings plan (RESPs) and registered retirement savings plan (RRSPs), are specifically excluded from the deemed disposition rule.

A deemed disposition of trust property does not necessary occur at every 21-year interval because there are other deemed disposition rules in the Income Tax Act relating to trust.

There are four common tax strategies to deal with the 21-year deemed disposition rule:

  1. do nothing;
  2. roll out the property to capital beneficiaries;
  3. freeze all corporate common share shares and distribute/roll out non-voting preferred shares to capital beneficiaries; and
  4. change the residency of the trust.



Additional information