A Canadian Trust Agreement is a legal document that creates an inter vivos (living) trust — a fiduciary arrangement where a settlor transfers ownership of specified property to a trustee, who holds and manages the property for the benefit of designated beneficiaries. Unlike a testamentary trust (created through a will), an inter vivos trust takes effect during the settlor's lifetime and can serve multiple estate planning objectives including probate avoidance, asset management during incapacity, and structured distributions to beneficiaries.

Canadian trust law is rooted in English common law and requires the presence of the three certainties for a valid trust: certainty of intention (the settlor clearly intends to create a trust), certainty of subject matter (the trust property is identifiable), and certainty of objects (the beneficiaries are ascertainable). These principles were confirmed by the Supreme Court of Canada and are codified in part through provincial Trustee Acts — Ontario’s Trustee Act (R.S.O. 1990, c. T.23), British Columbia’s Trustee Act (R.S.B.C. 1996, c. 464), and Alberta’s Trustee Act (R.S.A. 2000, c. T-8).

The tax treatment of inter vivos trusts in Canada is governed by the Income Tax Act (ITA). Inter vivos trusts are taxed at the top marginal tax rate on any income retained within the trust (ITA s.122(1)). However, income distributed to beneficiaries is taxed in the beneficiaries’ hands at their marginal rates, making distributions a key tax planning strategy. The trust must file a T3 Trust Income Tax and Information Return annually with the Canada Revenue Agency. Critically, ITA s.104(4) imposes a 21-year deemed disposition rule: every 21 years, trust property is deemed disposed of at fair market value, potentially triggering significant capital gains tax liabilities that require advance planning.

A trust may be revocable (the settlor retains the power to amend or terminate it during their lifetime) or irrevocable (the settlor permanently relinquishes control). Alter ego trusts and joint partner trusts, available to settlors age 65 and older, receive special tax treatment under ITA s.104(4)(a) — the 21-year deemed disposition is deferred until the death of the settlor (or the last surviving partner), making them valuable estate planning tools for older Canadians.

A Canadian Trust Agreement is needed when an individual wants to transfer assets to a trustee for structured management and distribution, rather than relying solely on a will. This is particularly important for probate avoidance — assets held in a properly funded trust pass directly to beneficiaries without the delays, costs, and public disclosure of the provincial probate process. In Ontario, the Estate Administration Tax is 1.5% on estate values over $50,000, making trust-based planning valuable for larger estates.

Parents with minor children use trusts to establish management provisions for inherited assets, ensuring that funds are used for education, health care, and living expenses under the trustee’s supervision until the child reaches an age specified by the settlor. This avoids the need for a court-appointed guardian of property.

Individuals concerned about incapacity planning create trusts to ensure seamless management of their financial affairs if they become unable to manage them. Unlike a power of attorney (which may be challenged or may not cover all assets), a funded trust provides the trustee with immediate authority to manage trust assets without court intervention.

Business owners place closely held business interests in trust to ensure continuity of operations, facilitate succession planning, and potentially implement an estate freeze (transferring future growth to the next generation while crystallizing the current owner’s tax liability).

Settlors who want to protect assets from a beneficiary’s creditors, family law claims, or poor financial judgment include spendthrift provisions that prevent beneficiaries from assigning or encumbering their interest. This is especially relevant for beneficiaries with addiction issues, high-risk businesses, or unstable relationships.

A valid Canadian Trust Agreement must identify the settlor, the initial trustee, and the successor trustee with full legal names and contact information. The trust must have a formal name and specify whether it is revocable or irrevocable — this distinction has significant legal and tax consequences. The agreement must state the governing province, as trust administration is governed by the applicable provincial Trustee Act.

The trust property (Schedule A) must be described with sufficient certainty to satisfy the common law requirement of certainty of subject matter. Real property should be identified by legal description or municipal address, financial accounts by institution and account number, and personal property by specific description. The settlor must actually transfer legal title to the trust property to the trustee — an unfunded trust (where assets are listed but not transferred) provides no benefit.

Beneficiary designations must identify primary and contingent beneficiaries with sufficient certainty to satisfy the requirement of certainty of objects. Include the distribution schedule (when and how trust property is distributed), provisions for minor beneficiaries, and contingent beneficiary provisions (what happens if a primary beneficiary predeceases the settlor). Specify whether distribution is per stirpes (to a deceased beneficiary’s descendants) or per capita (equally among surviving beneficiaries).

Trustee powers should be explicitly stated, including investment powers (subject to the Prudent Investor Rule), the power to sell and acquire property, the power to borrow and mortgage, the power to make tax elections, and the power to employ professional advisors. Compensation provisions must specify whether the trustee serves gratuitously or receives compensation. Include provisions for trustee resignation, removal, and succession. Tax provisions must address the annual T3 filing requirement, the 21-year deemed disposition rule, and the trust’s December 31 taxation year-end.