There are a variety of ways to minimize the amount of estate administration tax that must be paid on death by having assets pass outside of the estate. Potential strategies include transferring property into joint ownership,[1] using multiple wills, or using beneficiary designations. For clients who are aged 65 or older, alter ego trusts may be another option worth investigating.[2] This month’s Solicitor’s Tip addresses what alter ego trusts are, how they are taxed, and who may benefit from using them as an estate planning tool.
What is an alter ego trust?
Alter ego trusts are a type of inter vivos trust used for tax planning, available to individuals who are 65 or older.[3] Property is typically transferred into an alter ego trust on a tax-deferred basis, explained in more detail below, under which the settlor is entitled to all of the trust’s income during their lifetime.[4] Depending on the terms of the trust, the settlor may also be able to encroach on the trust’s capital. In most cases, the settlor also acts as trustee during their lifetime, although these trusts usually also name a successor trustee to act in the event of the settlor’s incapacity or death.
On the settlor’s death, the trust can either be continued for the benefit of other beneficiaries, or it may provide for the distribution of the trust property, akin to a will, by bypassing probate and probate tax.[5]
The taxation of alter ego trusts
Alter ego trusts can be beneficial for both estate and tax planning. As previously noted, the initial transfer of property into an alter ego trust is usually exempt from taxation due to the application of the rollover provisions of the Income Tax Act,[6] although it is possible to opt out on a property by property basis.[7] When assets are transferred into the alter ego trust, any capital gains arising from the deemed disposition of those assets are typically deferred until the settlor’s death.[8]
There are some potential drawbacks to using alter ego trusts, however. For example, once the settlor of an alter ego trust passes away, their estate cannot write off its capital losses against capital gains realized by the trust, since the trust and the settlor (and the settlor’s estate) are distinct taxpayers. Tax-deferred rollovers of trust assets to the settlor’s spouse and children are also not permitted.[9]
The tax advantages of alter ego trusts also depend on no one, other than the settlor, receiving income or capital from the trust during the settlor’s lifetime. Distributions of trust property to other beneficiaries prior to the settlor’s death can trigger a deemed disposition and the loss of the rollover,[10] and distributions of trust income to other beneficiaries can result in double taxation, in addition to tainting the trust and “causing the tax that was initially deferred to be realized.”[11]
Lastly, it merits noting that not all taxes related to an alter ego trust are deferred until the settlor’s death.
If the settlor is able to encroach on the assets held in the trust, subsection 75(2) of the Income Tax Act will apply,[12] meaning the trust will be subject to attribution rules and all trust income will be taxed in the hands of the settlor.[13] In any event, during the settlor’s lifetime, all trust income will be taxed in their hands.[14] When property is first transferred into the trust, tax obligations other than income tax may also arise.[15]
Clients who would benefit from alter ego trusts
Although any Canadian resident aged 65 or older can settle an alter ego trust, this estate planning tool is not suitable for everyone. Ideally, the savings resulting from avoiding probate tax will exceed the costs of establishing and administering the alter ego trust,[16] as well as the tax consequences triggered on the settlor’s death. As such, alter ego trusts are usually most appropriate for larger or more complex estates, and clients with a high net worth.[17]
That said, alter ego trusts may also warrant consideration under other circumstances, such as:
- When a client owns real property in multiple jurisdictions in Canada. Transferring the properties into an alter ego trust can offer the client real value, as their estate can avoid the cost of applying for probate for the trust property, applying to have the grant of probate resealed in the other jurisdictions where the client owns property, and paying a bond in those other jurisdictions.[18]
- When a client has been diagnosed with a terminal illness,[19] and does not anticipate having to maintain an alter ego trust on a long-term basis.
- When a client wants to protect their privacy; dispositions made through an alter ego trust are not made public because they pass outside of the estate and need not be referenced in a probated will.
- When a client has lost capacity. While the Substitute Decisions Act, 1992, does not authorize an attorney for property to make a will on behalf of a donor,[20] case law suggests that an attorney may be able to execute an inter vivos trust, like an alter ego trust, on behalf of the donor,[21] so long as the terms of the trust that dispose of the property are consistent with the donor’s will. It would also be necessary to draft the alter ego trust so that the settlor is a capital beneficiary, as “[n]o barrier can be constructed in establishing the terms of trust that would prevent the trustees from using the capital for the benefit of the settlor.”[22]
Conclusion
Alter ego trusts are often touted as a way to avoid probate tax, but they can also offer broader benefits under the right circumstances. More specifically, alter ego trusts can provide meaningful advantages with respect to privacy protection and multi-jurisdictional property ownership. However, given the potential tax consequences that can follow if alter ego trusts are used indiscriminately, these instruments should not be treated as a default probate-avoidance tool. Rather, alter ego trusts are best suited for clients whose circumstances justify the cost and complexity involved. When used thoughtfully and in conjunction with a client’s overall estate plan, an alter ego trust can be a highly effective instrument.
[1] See Suzana Popovic-Montag, “Tips for Gifting a Right of Survivorship” (4 February 2025), online (blog): Hull & Hull LLP <https://hullandhull.com/2025/02/tips-for-gifting-a-right-of-survivorship/>.
[2] Please note that this Tip is not intended to address joint spousal trusts.
[3] Vines v Wilcock, 2025 BCCA 393 at para 2. Also see the Income Tax Act,RSC 1985, c 1 (5th Supp), s 248(1) “alter ego trust”.
[4] As noted in Donovan Waters, Mark R. Gillen and Lionel D. Smith, Waters’ Law of Trusts in Canada, 5th ed (Toronto: Thomson Reuters, 2021) at 13.II – The Contemporary Canadian Scheme of Taxation [Waters], the intent is that the settlor can live off the trust’s income until they pass away.
[5] See, for example, the alter ego trusts discussed in Chalmers v Chalmers Alter Ego Trust, 2017 BCSC 2646 and Bank of Nova Scotia Trust Company v Mount Sinai Hospital Foundation of Toronto, 2025 NSSC 319.
[6] Supra note 3, s. 73. See also Waters, supra note 4 at 13.II, 13.III.
[7] Lindsay Ann Histrop, Estate Planning Precedents: A Solicitor’s Manual (Toronto: Thomson Reuters, 1995) (loose-leaf) at § B:11 [Histrop]. For example, an individual may opt out in order to take advantage of capital gains exemptions.
[8] If, however, the trust makes an election under section 104(4)(a)(ii.1) of the Income Tax Act, supra note 3, to avoid the deemed disposition of trust property on the settlor’s death, “no rollover will be available on the transfer of the assets into the trust, and the first deemed disposition of the trust will occur 21 years after the establishment of the trust and every 21 years thereafter”: Histrop, ibid at § B:2. See also Waters, supra note 4 at 13.II.
[9] Anne Armstrong, Estate Administration: A Solicitor’s Manual (Toronto: Thomson Reuters, 1984) (loose-leaf) at § IF:18 [Armstrong]. See also Elizabeth Bozek and Maureen Berry, “Alter Ego Trusts: The Jekyll or Hyde of Estate Planning? – An Examination of Why an Alter Ego Trust is an Estate Planning Tool that is not Appropriate in all Circumstances” in Armstrong, supra note 9 at § RA:42 [Bozek and Berry].
[10] See the Income Tax Act, supra note 3, s 107(4). See also Waters, supra note 4 at 13.II.
[11] Bozek and Berry, supra note 9 at § RA:42.
[12] Supra note 3, s. 75(2).
[13] Bozek and Berry, supra note 9 at § RA:42. See also Histrop, supra note 7 at § B:11.
[14] Bozek and Berry, ibid. See footnote 50 of their article (all amounts not attributed under s. 75(2) of the Income Act, ibid,must be attributed to the settlor’s income under s. 104(13)).
[15] For example, land transfer tax may be incurred if real property is transferred into the trust. See Bozek and Berry, ibid at § RA:42.
[16] For example, a T3 must be filed annually for alter ego trusts.
[17] Bozek and Berry, supra note 9 at § RA:42, citing Christine Van Cauwenberghe, Wealth Planning Strategies for Canadians 2020 (Toronto: Thomson Reuters Canada, 2019) at 597.
[18] See Histrop, supra note 7at § B:11; Armstrong, supra note 9 at § IF:18; Mawdsley v Meshen, 2012 BCCA 91 at para 2.
[19] Histrop, ibid at § B:2.
[20] SO 1992, c 30, ss 7(2), 8(1)(c).
[21] See Easingwood v Cockroft, 2013 BCCA 182. This decision has been interpreted and applied in Ontario – see Testa v Testa, 2015 ONSC 2381.
[22] Histrop, supra note 7 at § B:11. The text also notes: “If this requirement is not met, then the act of setting up the trust would violate the attorney’s obligation to administer affairs for the exclusive benefit of his or her incapacitated ward.”