If you created a trust in 1989, when Brian Mulroney was just starting his second term as prime minister, Wayne Gretzky was a newcomer to the National Hockey League’s Los Angeles Kings and Milli Vanilli was at the top of the pop charts — then, heads up.

Unless you take quick action, you could be surprised with a significant tax bill. That’s due to a little-known rule first enacted in 1972 (along with the first capital gains legislation). When any trust reaches its 21st anniversary, the assets in the trust are deemed to be sold. If they have increased in value, a substantial capital gain may be created, resulting in a potentially significant tax bill.

The origin of this rule is not surprising: the taxman does not want taxpayers avoiding capital gains taxes indefinitely by parking their assets in trusts. Trusts, in theory, could have an unlimited lifespan, and the taxes on accrued gains inside of them could be deferred indefinitely.

As Aurele Courcelles, director of tax and estate planning with Winnipeg-based Investors Group Inc., says: “[The Canada Revenue Agency] wants its pound of flesh at some point.”

The 21-year deadline isn’t as big a concern for people with income-producing trusts or those who have disposed of assets from their trusts recently, because they’ll have to file a tax return for the trust with the CRA in any case.

Kathy Munro, tax services partner in PricewaterhouseCoopers LLP’s private company services practice in Toronto, says she’s worried that many trustees aren’t paying attention to the deadline. “If they’re not filing trust returns,” she says, “they might not realize that an anniversary is coming up. If the date goes by, that’s it. The gain will be realized and subject to taxes. There has to be positive action to move the assets out of the trust before the anniversary.”

If you play your cards right and transfer the assets to the trust’s beneficiaries, for example, the tax bill can be deferred for an additional 10, 15 or even 30 years. “Tax deferral isn’t quite as good as tax savings, but you’ll have your money working for you for that much longer,” says Courcelles

Deferring the inevitable could also lead to a lower tax rate down the road, he adds. If you’re in your income-earning prime and the deemed disposition kicks in after 21 years, you are likely to pay taxes on the gains at a relatively high marginal rate. If the assets are transferred to the beneficiaries, however, they may be in lower tax brackets — or anticipating moving into a lower bracket in the future, when the gain is triggered.

“By deferring [the taxes],” Cour-celles says, “you benefit from the deferral and the possible tax consequences. You also continue to have control over when that gain is realized. If [the assets are] left in the trust, you lose control.”@page_break@There are other strategies that can be used to delay paying the “21-year tax.” But tax experts warn that individual circumstances vary, so it’s best to discuss the options with a financial advisor and those involved with the trust before taking action.

It can be tricky to distribute the assets to beneficiaries if they don’t live in Canada. If a parent has two children, one living in Canada and another in the U.S., assets can be given to the former on a rollover basis without a single dollar being paid in taxes. Giving assets to the non-resident child, however, triggers the capital gain and a tax bill.

There is however, a way to avoid that, Munro says: if the child in the U.S. incorporates a Canada-based holding company for a nominal amount and the company is named as a beneficiary of the trust, the assets can be distributed to the child through this company without triggering any capital gains or taxes.

Or, if you’re prepared to pay the taxes but don’t want to do it all in one fell swoop, there is another option: you can trigger the gains on a regular basis in the years leading up to the 21st anniversary, which spreads out the tax bill into smaller amounts and potentially reduces the overall bill, depending on your tax bracket.

Not all trusts, however, are created equal in terms of the deemed disposition of the assets. There is some relief for trusts set up for spouses or common-law partners. In those cases, there is no deemed disposition until the beneficiary spouse dies.

In the case of a joint spousal or common-law partner trust, there is no deemed disposition until the last surviving spouse dies.

But you can’t decide to take action at the last minute. Some strategies take a number of months or even years to implement.

Monique Trépanier, senior will and estate planner for Bank of Nova Scotia’s private client group in Vancouver, says that moving the residence of the trust sometimes will allow the trustee to take advantage of lower tax rates.

Alberta is a popular province for that reason. Says Trépanier: “You’d have to weigh the tax savings against the inconvenience of having it administered in another province.”

One argument against making a capital distribution from a trust is that it leaves less income for the life tenant — the person who will earn income from the trust. For example, says Trépanier, if all the assets from one spouse’s trust are to go to the surviving spouse but a significant amount of capital is taken out and given to the children first, the surviving spouse could suffer.

“How have you affected the life tenant?” she says. “You’ve created a hardship for them because they won’t have as much income.”

Clearly, it pays to do considerable advance planning when it comes to 21-year trusts. IE