Testamentary vs Inter Vivos Trust: Key Differences in Canada

An inter vivos trust is set up during the settlor’s lifetime; a testamentary trust is created by a will when the person dies. This page compares how each is taxed, the graduated rate estate and qualified disability trust exceptions, and the situations each tends to suit. It is part of the corporate, trust and estate tax guides; the most common inter vivos trust for tax planning is covered in the family trust guide.

Overview: Two Types of Trusts

*Exceptions: Graduated Rate Estates (first 36 months) and Qualified Disability Trusts.

Inter Vivos (Living) Trusts

Characteristics

Common Uses

Tax Treatment

Key Dates

Testamentary Trusts

Characteristics

Common Uses

Graduated Rate Estates

The first 36 months after death, an estate can be designated as a Graduated Rate Estate (GRE):

Qualified Disability Trusts (QDTs)

Non-Qualifying Testamentary Trusts

Side-by-Side Comparison

When to Use Inter Vivos Trusts

Best For

Example: Family Business

A business owner creates an inter vivos family trust to hold shares of their company:

• Trust distributes dividends to adult family members
• Each beneficiary can use their own lifetime capital gains exemption on a sale of qualifying shares
• Succession planning built in
• Asset protection if structured correctly

When to Use Testamentary Trusts

Best For

Example: Trust for Minor

A parent’s will creates a testamentary trust for their 10-year-old child:

• Trustee manages assets until child is 25
• Funds available for education, health, maintenance
• Capital distributed in stages (e.g., 1/3 at 25, 30, 35)
• Protects inheritance from poor decisions

Spousal Trust Comparison

Inter Vivos Spousal Trust (Alter Ego/Joint Partner)

Testamentary Spousal Trust

Tax Planning Considerations

Attribution, TOSI and the 21-Year Rule

Three rules apply to both kinds of trust, with differences in timing or reach:

• Attribution: income on property a living settlor transfers to an inter vivos trust for a spouse or minor can be taxed back to the settlor; a testamentary trust generally has no attribution because the settlor has died. The rules are explained in attribution rules in Canada.
• Tax on split income: income from a family business that either kind of trust passes to related minors, and to adults who don’t meet an exclusion, can be taxed at the top rate under TOSI.
• 21-year rule: an inter vivos trust is deemed to dispose of its capital property 21 years after it was created, a testamentary trust 21 years after the death; how that works and the usual planning are in the family trust guide’s 21-year rule section. Both require planning to avoid forced capital gains recognition.

Cost Comparison

Inter Vivos Trust

Testamentary Trust

Choosing Between Trust Types

Decision Framework

Often Both

Many estate plans include both types:

• Inter vivos trust for business/cottage now
• Testamentary trust for residual estate

Key Takeaways

• Inter vivos trusts work during your lifetime; testamentary trusts are created at death
• Both generally pay tax at top marginal rates on undistributed income
• GREs (first 36 months) and QDTs are exceptions with graduated rates
• Inter vivos trusts can avoid probate; testamentary trusts cannot
• Both are subject to TOSI rules for income splitting
• Both face the 21-year deemed disposition rule
• Which fits depends on the family, the assets and the timing, which is why estate and tax professionals are usually involved

Related Reading

• Selling Your Business in Canada: Asset Sale vs Share Sale, LCGE, and Tax Planning (2026)
• Maximum Disability Tax Credit Canada 2026 | How Much Can You Get?
• Disability Tax Credit Canada 2026 | Eligibility and How to Apply

→ Back to: Complete Canadian Tax Guide