"IN TRUST" ACCOUNTS

When preparing personal tax returns, we often must address the taxation of "In Trust" accounts. If you have set up or are considering setting up an In Trust account please review the following memorandum which addresses many of the issues.
For purposes of this memorandum assume a grandparent has set up an In Trust account by way of investing $1,000 in a mutual fund. Assume the mutual fund earns $50 of dividend income and $10 capital gain.
Who Owns The Mutual Fund?
We believe it is generally the intention of the grandparent to make a gift to the grandchild. Accordingly, if there is no evidence to the contrary, we believe the grandchild owns the mutual fund.
The only reason for the "In Trust" is that from a legal perspective generally the financial institution / mutual fund company cannot be bound under contract with a minor.
Who Is The "Decision Maker" Regarding The Mutual Fund?
Generally, the grandparent will sign as agent for the grandchild and authorize himself / herself as the decision-maker regarding the mutual fund.
Who Pays The Tax?
There are several provisions within the Income Tax Act that deal with transfer of funds between parents / grandparents and children / grandchildren. The general intent of the rules is to prevent "income splitting" with children or grandchildren who are taxed at the lower rates.
In our example, the grandparent is technically required to include in income the $50 of dividend income generated by the mutual fund. There is no provision which attributes the $10 capital gain back to the grandparent and accordingly it would be taxed in the hands of the grandchild.
From a practical perspective, Canada Customs and Revenue Agency does not seem to be too concerned about relatively small amounts being accumulated by way of gifts at Christmas or birthdays where it is not the intent to split the income.
For more significant amounts it is clearly Canada Customs and Revenue Agency's position that the income should be attributed back to the grandparents whose social insurance number should be put on the fund.
The social insurance number of the grandchildren should be registered with their financial institution. This is very important to avoid unnecessary problems with Canada Customs and Revenue Agency.
What Happens When The Grandchild Turns 18?
The grandchild is the owner of the mutual fund and at age 18 has complete control over the account.
Are "In Trust" Accounts A Good Idea?
For the purpose of receiving gifts that do not accumulate more than say $10,000 to $15,000, it is a relatively convenient way of holding investments for minor children or grandchildren.
However, if an "In Trust" account accumulates more significant amounts we suggest that other alternatives be considered. These may include setting up a formal Trust arrangement or utilizing Registered Education Savings Plans.
If you are considering setting up an "In Trust" account, we recommend that you first seek professional advice.

"Information contained herein is of a general nature. No action should be taken without seeking professional advice that takes into account current developments and the specific facts of a particular situation."

[Updated - February 20, 2010]