Cross-Border Trusts

A trust is one of the most useful tools in Canadian and US estate planning, but it is also one of the few structures that two tax systems can claim at the same time. The moment a trust touches both countries — a Canadian family trust with a child who has moved to the United States, a US revocable living trust held by someone who retires to Canada, a non-resident trust funded by a Canadian, or a trust whose residency drifts when a trustee relocates — Canada and the US can each reach different conclusions about who is taxable, on what income, and in which year. Left unmanaged, the same dollar of trust income can be taxed twice, reporting penalties can dwarf the tax itself, and a structure built for one country can quietly defeat its own purpose in the other. The work is in planning around the seams.

This page explains how cross-border trusts are treated under each system, where the Canada-US tax treaty does and does not help, and the traps that surprise families and trustees most often. It is written for settlors, trustees, executors, and beneficiaries who have a foot on each side of the border. Our cross-border trust work is led by Simone Barrett, who is admitted in Ontario and Florida, and it sits within our broader Canada-US cross-border tax practice.

Two systems, two definitions of “trust”

The Canadian Income Tax Act and the US Internal Revenue Code treat trusts in fundamentally different ways. Canada generally taxes a trust as a separate taxpayer, with income either taxed inside the trust at the top marginal rate or flowed out and taxed in the hands of beneficiaries who receive or are made entitled to it. The US, by contrast, draws a binary line between grantor and non-grantor trusts. Whether a trust is a grantor trust turns on whether the settlor (or in some cases a beneficiary) has retained certain powers over the trust; if it is a grantor trust, its income is taxed to that person as though the trust did not exist, regardless of whether anything is distributed.

These are not two labels for the same thing. A structure that is a flow-through for Canadian purposes may be a grantor trust, a non-grantor trust, or something with no clean US analogue. A US revocable living trust — the routine probate-avoidance vehicle for many Americans — is a grantor trust ignored by the IRS, but Canada may view the same arrangement as a separate person, or may attribute its income to the settlor under different rules. When the two characterizations diverge, the timing and the taxpayer can fall out of step, and treaty relief does not always line them back up. Identifying the mismatch early is what keeps a cross-border trust from producing double tax or a failed plan.

Section 94 — the deemed-resident-trust rule

Section 94 of the Canadian Income Tax Act is the rule most likely to surprise a non-Canadian trustee, because it can pull a trust that has no Canadian trustee, no Canadian situs, and no Canadian assets into the Canadian tax net. In broad strokes, a non-resident trust may be deemed resident in Canada for most purposes of the Act if it has a “resident contributor” (a Canadian-resident person who has contributed property to the trust) or a “resident beneficiary” (a Canadian-resident beneficiary where a connected contributor is also Canadian-resident).

The consequences are significant. A deemed-resident trust files a Canadian T3 return on its worldwide income, not merely on its Canadian-source income. Canadian contributors and beneficiaries, and the connected contributor in particular, can be made jointly and severally liable for the trust's Canadian tax — so a beneficiary's exposure is not limited to what they actually received. The rule is broad enough to catch many ordinary US trusts that an American family set up long before anyone contemplated that a beneficiary or contributor would move to Canada. A US dynasty trust or a parent's irrevocable trust naming a now-Canadian-resident child can become a Section 94 problem without anyone having signed a new document. We discuss the mechanics further in our guide to Section 94 and cross-border trusts.

The US grantor-trust regime and Section 679

On the US side, IRC sections 671 through 679 decide whether a trust is a grantor trust. Grantor-trust status is often desirable for purely domestic US planning — income taxed to the grantor lets the trust assets grow without being depleted by the trust's own tax — but the benefit only holds when both countries' rules point the same way. A trust that is a US grantor trust as to a US settlor and is also a Section 94 deemed-resident trust on the Canadian side can produce the same income taxed by both countries in the same year, with treaty foreign-tax-credit relief that is rarely perfect because the two systems are taxing different persons.

Section 679 is the provision that most often catches cross-border families off guard. It treats a US person who transfers property to a foreign trust that has (or is presumed to have) a US beneficiary as the grantor of that trust for US income-tax purposes — regardless of how the trust would be characterized under state or foreign law. Once Section 679 applies, the US person reports the trust's income annually and, with the trust, files Forms 3520 and 3520-A. These are not nominal filings: under IRC section 6677, a failure carries a penalty equal to the greater of US$10,000 or 5% of the trust assets the person is treated as owning (for the ownership/Form 3520-A failure), with separate distribution-reporting penalties of the greater of US$10,000 or 35% of the distribution, plus continuation penalties for ongoing non-compliance. For many families the reporting penalty is a far larger risk than the underlying tax, which is why these obligations belong in the plan from day one rather than after a notice arrives. Where filings have been missed, our work on Streamlined Filing Compliance Procedures may offer a path to catch up without the full penalty exposure.

Throwback rules and accumulation distributions

If a foreign non-grantor trust accumulates income in years when it makes no distributions and later pays out that accumulated income (its “undistributed net income,” or UNI) to US beneficiaries, the US throwback rules under IRC sections 665 through 668 can apply. They tax the accumulation distribution roughly as if it had been paid out in the years it was earned, and then layer on a non-deductible, non-creditable interest charge that compounds at the section 6621 underpayment rate from those earlier years forward.

The longer income has accumulated, the more corrosive the result. The interest charge is designed to strip away the value of the deferral, and over a long enough period the combined tax and interest can approach — or in extreme cases effectively consume — the entire UNI distribution. For a Canadian family trust that has quietly accumulated income for years and then distributes to a child living in the US, this can turn what looked like ordinary estate planning into a punitive levy. Planning to avoid the throwback — distributing income currently so it never becomes UNI, or arranging matters so the trust is a grantor trust before distributions begin — is almost always preferable to triggering it after the fact.

The Canadian 21-year rule and distributions abroad

Canada imposes its own timing discipline. A Canadian-resident trust is generally subject to a deemed disposition of its capital property at fair market value every 21 years, which can crystallize accrued gains inside the trust even though nothing has been sold. The instinctive fix — distributing appreciated property out to beneficiaries before the 21-year mark — works smoothly for resident beneficiaries but not for non-residents. Under subsection 107(5), a tax-deferred rollout to a non-resident beneficiary is generally denied for most property (with limited exceptions, broadly for direct interests in Canadian real property), so distributing to a child who now lives in the US can itself trigger a deemed disposition and Canadian tax.

This is an area of active legislative change, so dates matter. Recent amendments have tightened the anti-avoidance rule that prevents trusts from resetting the 21-year clock through trust-to-trust transfers, and Canada's expanded trust reporting now requires most express trusts to file annual T3 returns disclosing the identities of settlors, trustees, beneficiaries, and certain controlling persons. A cross-border family trust approaching its 21-year anniversary with US-resident beneficiaries needs a plan that accounts for both the Canadian deemed disposition and the US throwback consequences of any distribution — the two interact, and optimizing for one can worsen the other.

Migration, residency drift, and termination

A trust's residency is not fixed at creation. In Canada, a trust is generally resident where its central management and control actually sits — in practice, where the trustees who make the real decisions reside — not simply where the trust deed says. When a Canadian trustee dies, retires, or relocates, the trust's residency can shift with them. A trust that was Canadian-resident can become US-resident and trigger US trust-migration consequences; a US trust whose decision-making moves north can become Canadian-resident and trigger a deemed disposition under section 128.1 of the Canadian Income Tax Act, the same emigration mechanism that drives individual departure tax (covered in our overview of leaving Canada and departure tax). Trustee succession that is chosen for convenience, without regard to residency, is one of the most common ways a sound structure quietly breaks.

Common cross-border trust traps

• The US revocable living trust that follows a client to Canada. A standard American probate-avoidance trust can be re-characterized once the settlor is Canadian-resident, creating Canadian filing and potentially Section 94 exposure that the original US plan never anticipated.
• The Canadian family trust with a child who emigrates. A beneficiary moving to the US can convert the trust into a foreign trust for US purposes, dragging the child into Forms 3520/3520-A and exposing future distributions to the throwback rules.
• Naming a US person as trustee or protector. Giving a US person decision-making power can taint the trust's US characterization and create unintended grantor-trust or reporting results.
• TFSAs, RESPs, and similar registered plans. Several Canadian registered vehicles are treated as foreign trusts by the IRS, creating annual US reporting and current US taxation for US-person holders that the Canadian tax benefit does not shelter.
• Estate plans that ignore US estate tax. Trust planning and US estate-tax planning have to be designed together; the two are addressed in detail on our estate planning page.

Where the Canada-US treaty helps — and where it does not

The Canada-US tax treaty mitigates double taxation in important ways, but it was not written to harmonize the two trust regimes, and it leaves real gaps. On the income side, foreign-tax-credit mechanics can relieve some double taxation, but they work poorly when Canada is taxing the trust as a separate person while the US is taxing the grantor — the credit assumes the same taxpayer is being taxed by both countries, and a grantor/non-grantor mismatch breaks that assumption.

On death, Article XXIX-B of the treaty provides meaningful relief for a Canadian-domiciled individual who is not a US citizen by extending a pro-rata share of the US unified credit — the credit tied to the US estate-tax exclusion, which is US$15 million per person as of 2026 under the One Big Beautiful Bill Act (inflation-indexed beginning in 2027, and a figure that can change with future US legislation). The pro-rata credit is based on the proportion of US-situs assets to worldwide assets, and the treaty also offers a marital credit in some situations. But it does not relieve US gift tax, and it does not solve the income-tax mismatches described above. The treaty is a backstop against double taxation on death, not a substitute for getting the structure right while everyone is alive. For Canadians worried about US estate-tax exposure on US-situs assets — including US securities held in trust — see our guide on US estate tax for Canadians and snowbirds, and for mixed-citizenship families, our overview of cross-border estate planning with mixed citizenship.

How Barrett Tax Law approaches cross-border trusts

Most cross-border trust engagements begin with a structural diagnosis rather than a recommendation. We map who contributed what and when, who the current and contingent beneficiaries are, where each trustee actually exercises control, and what the trust deed permits — then we read that against both the Canadian Income Tax Act and the Internal Revenue Code at the same time. From there we model the Canadian and US tax positions under each scenario the trust is realistically going to face: annual income, capital distributions, a beneficiary moving across the border, the 21-year anniversary, a trustee change, and the settlor's death. The goal is to see where the two systems disagree before a transaction forces the issue.

Where a structure is sound, we document the positions and the elections that keep it aligned. Where it is exposed — an unfiled Form 3520, a looming throwback distribution, a residency that has already drifted, a US revocable trust that no longer fits a now-Canadian settlor — we set out the remediation options and their trade-offs in plain terms, including, where appropriate, voluntary-disclosure or streamlined catch-up filings. Families and trustees can review the analysis and decide what to act on. If you are setting up, inheriting, or trying to clean up a trust that touches both countries, you are welcome to book a free consultation to talk through where your structure stands. Related reading: our overview of family trusts in tax and estate planning.

This page is general information, not legal or tax advice. Cross-border trust outcomes depend heavily on the specific facts — the trust deed, the residency and citizenship of everyone involved, and the interaction of Canadian and US rules — and both countries' rules change over time. Figures stated above are current as of 2026 and may change; confirm your own situation with a qualified advisor before acting.