On January 29, 2026, the Department of Finance requested views and feedback (the “Consultation”) on the draft legislative proposals contained in the November 4, 2025, budget (“the 2025 Budget”.  Specifically, the Consultation includes, among other things, the “21-Year Rule”.

By way of background, the 21-year rule results in a deemed disposition, at fair market value, of all capital property held by the trust on the 21^st anniversary of the trust.  Generally, tax practitioners advise the trustees of the trust to distribute the capital property, on a tax-deferred basis, prior to the 21^st anniversary to avoid the application of the deemed disposition rule [107(2)].

In addition, the Income Tax Act contains an anti-avoidance provision [104(5.8)] which prevents avoidance of the deemed disposition rule through trust-to-trust transfers.  Essentially, the provision prevents an old trust from transferring property to a new trust in attempt to “refresh” the 21^st anniversary.

The 2025 Budget contains a proposed amendment to the preamble of Subsection 104(5.8).  The existing legislation, in general, reads “where property is transferred from a transferor trust to a transferee trust” (summarized).  The proposed amendment, in general, will read “where property is transferred, directly or indirectly in any matter whatever […].

Why does this matter?  It matters because the wording of the proposed amendment is extremely broad and could result in the following:

• The acceleration of the deemed disposition rule (date) that would not otherwise apply.
• The application of the deemed disposition rule on property, which was distributed pursuant to subsection 107(2), and contributed to a new trust could be viewed as an indirect transfer, even though there was no intent to refresh the 21^st anniversary date.
• Property received pursuant to subsection 107(2), could be sold to an arm’s length trust, which may be viewed as an indirect transfer, and the Purchaser could inherit the 21-year deemed disposition date of the original trust.

In conclusion, the proposed amendment is too broad and, if passed, could apply to a number of trust and estate planning transactions where there was no intent of avoiding the application of the 21-year deemed disposition rule in respect of trust-to-trust transfers of capital property.

If you have questions or would like further information, we can help.  Please contact Dale Franko, Partner to learn more.