Even though trusts are not separate legal entities, they are treated as a separate taxpayer, and you must file a T3 tax return, report its own income, and pay the income tax bill. Let’s consider the various tax implications:
Marginal Tax Rates for Trusts
In 2025, the top marginal tax rate for an individual starts after $609,359, while that of trusts is $15,200. Canadian trusts reach the highest marginal income tax rate at an extremely lower threshold than individual taxpayers. The inter-vivos marginal tax rate is 33% nationally, but the provincial rate varies between 15% and 25%. Testamentary trusts generally benefit from graduated tax rates if they qualify as a Graduated Rate Estate (GRE) or Qualified Disability Trust (QDT). Otherwise, they are taxed at the top marginal rate.
Taxable Income and Taxes Payable for Family Trusts
The income the trust receives comes from diverse sources of revenue, such as capital gains, dividends, and business income. The taxable income is then calculated by subtracting this income from the deductions and credits made to the trust. After the calculations, use the taxable income rate (currently at 33%) to calculate the taxes payable - testamentary trusts may benefit from lower rates if they qualify as GREs.
Tax Benefits of Setting Up a Family Trust
A family trust allows income splitting, where the trust’s income is distributed to the beneficiaries in a lower income bracket than the settlor. This provision minimizes the amount of tax payable. On capital gains, the trust can allocate the capital gain to the beneficiaries with lower marginal tax rates. Further, the trust allows deferment of capital gain taxes until the beneficiaries decide to sell the assets. This provision can help the beneficiary plan for taxes and minimize the tax burden.
Dividend Tax Credit for Family Trusts
A family trust with shares in a Canadian corporation can benefit from the dividend tax credit. When your family trust becomes eligible for dividends, you can claim the dividend tax credit and reduce the amount you pay as tax for the dividend income. The dividend tax credit is among the tax benefits because it prevents double taxation on corporate profits as it appreciates that the corporation had already paid income tax before distribution.