Alter-Ego Trusts in Canada — A Probate-Avoidance Tool for Canadians 65 and Older

A 72-year-old retired pharmacist in West Vancouver owns her townhouse outright ($1.4M), a non-registered investment account ($800K), and her RRIF (named beneficiary already in place). She is widowed, has two adult children she trusts, and is in good health. Her estate planner runs the numbers: leaving the house and investments through her will would generate roughly $30,000 in BC probate fees alone, plus 4-to-8 months of administrative delay before her children can access the funds. An alter-ego trust would cost about $6,500 to set up and would eliminate both. She signs.

This guide walks through what an alter-ego trust actually is, when the math works, when it doesn't, and the practical mechanics for Canadian settlors considering one. For broader context, see our pillar guides on what probate is in Canada and how to avoid probate in Canada.

What an alter-ego trust is #

An alter-ego trust is an inter-vivos (living) trust that meets specific requirements in section 73 of the Income Tax Act.^[1] The defining features:

• The settlor must be at least 65 at the time the trust is settled.
• The settlor is entitled to all of the trust's income during their lifetime.
• During the settlor's lifetime, no one else can receive any income or capital from the trust.
• On the settlor's death, the trust assets pass to named beneficiaries (or stay in trust for them).

When those conditions are met, the property transferred to the trust rolls in at the settlor's adjusted cost base — no capital-gains tax is triggered by the transfer itself. The trust holds the assets, the settlor lives off them, and on death the trust's assets pass outside the will and the probate file.

A joint-partner trust is the same structure adapted for spouses or common-law partners — both spouses are settlors and beneficiaries during their joint and successive lifetimes.

Why the structure is attractive #

Three benefits do the work:

Probate-fee avoidance. Assets owned by the trust on the settlor's death are not part of the settlor's estate for probate purposes. In BC, Ontario, and Nova Scotia, where probate fees are uncapped percentages, this can save tens of thousands of dollars on a large estate.

Privacy. Probate filings become a public record, and the will is part of the file. A $3,000,000 estate that goes through probate is searchable by name. The same estate funded through an alter-ego trust passes privately, with the trust deed never filed publicly.

Speed for survivors. Trust assets are available to the named beneficiaries (or under the trust's continuing terms) immediately on death. No waiting for a grant; no waiting for affidavits of service; no 21-day Notice of Proposed Application window in BC.

Some capacity protection. If the settlor loses capacity, the trustee continues managing trust assets without the cost and delay of a power of attorney, a committee, or a guardianship application.

Why the structure is not universally adopted #

The downsides are real and frequently understated by promoters:

Setup and ongoing costs. Drafting the trust deed properly is legal work — typically $3,000 to $10,000+ depending on complexity. Funding the trust (transferring title of the home, brokerage accounts, and other capital property into the trustee's name) carries its own legal and administrative cost. Each year the trust files a T3 trust return,^[3] with accounting fees of $500 to $2,000+ depending on income complexity.

Tax rate on trust income. Income earned inside the trust is taxed at the highest marginal rate. The graduated-rate-estate concession that gives some testamentary trusts three years of access to graduated tax brackets does not apply to alter-ego trusts. For settlors with significant income inside the trust, this can erode the probate-fee savings.

Principal residence exemption complications. A home held in an alter-ego trust can still qualify for the principal residence exemption with careful drafting, but the rules tightened in 2017 — newer trust documents and individual fact patterns each need a tax-lawyer review.

Deemed disposition on death. On the settlor's death, section 104(4) deems the trust to have disposed of all its capital property at fair market value.^[2] The resulting capital gains are taxed inside the trust at the top marginal rate — the same outcome (or worse) as if the settlor had owned the assets personally and died. The trust saves probate fees, not income tax on death.

21-year deemed disposition rule. Inter-vivos trusts in Canada are generally deemed to dispose of their capital property every 21 years, triggering tax on accrued gains. For an alter-ego trust, the first deemed-disposition day under the Income Tax Act is the settlor's death rather than a 21-year anniversary; the 21-year clock then runs on the continuing trust after death.^[2] The rule still needs to be on the planner's radar wherever the trust is designed to carry on for beneficiaries.

Loss of OAS clawback planning room. Income earned by the trust before the settlor's death is generally attributed to the settlor (or treated as if it were the settlor's), so the trust does not provide an income-splitting opportunity during life.

When the math works #

A practical rule of thumb: alter-ego trusts pay back on estates above roughly $1,000,000 in non-registered, non-joint-tenancy assets, in provinces with uncapped probate fees (BC, Ontario, Nova Scotia).

A simplified BC illustration:

The fee math alone takes longer than most people expect to break even. Where alter-ego trusts genuinely earn their keep is the combination of fee savings, privacy, and continuity for the family — at higher estate values where all three pieces matter.

What to ask before setting one up #

Before signing a trust deed:

• Have I run the math against the alternatives? Joint tenancy with the spouse on the home, named beneficiaries on registered accounts, multiple wills (in Ontario, for business assets) — each can achieve probate-fee savings at lower cost.
• Who is the trustee, both initially and on incapacity? The trustee runs the assets. Naming yourself as initial trustee is common; the successor trustee inherits the responsibility.
• What happens to the principal residence exemption? The structuring matters and tightened in 2017.
• How will the trust interact with a US-property structure if the settlor owns property south of the border?
• What's the exit plan if circumstances change — divorce, remarriage, beneficiary problems? Trust deeds vary in their amendment flexibility.

Alter-ego trusts are sophisticated planning tools that pay back when the fact pattern fits. They are not a default — the wrong settlor in the wrong province pays for the structure without seeing meaningful savings.

For related structures, see our coverage of joint-spousal trusts and the broader strategy in how to avoid probate in Canada. For the probate-fee picture in your province, see our probate fee calculator.

What we focus on at It's Simple Will #

It's Simple Will builds wills and Life Discovery Kits for ordinary Canadian estates — the bulk of estates where the alter-ego trust math doesn't pay back. For estates where it does, the will still has work to do (residual clauses for assets that weren't funded into the trust, executor appointment for whatever remains in the estate, guardian appointment for minor beneficiaries, etc.). See our pillar guides on what probate is in Canada and what does an executor do in Canada, and visit It's Simple Will to start your own document set.