What is an in-trust account?

An in-trust account is an “informal trust” that lets you invest money on behalf of a child. It’s much easier to open than a normal trust, but it’s also less recognized in the eyes of financial and legal authorities if any tax or account ownership issues arise. That said, an in-trust account can be a cheap and effective savings tool if you follow the steps to set up a solid contract.

What is an in-trust account?

An in-trust account lets you save or invest money on behalf of a child until they are old enough to carry out their own investments. Much like a regular trust, any cash or investments you put into an informal trust account will be assigned to the child as soon as you make the transfer. This means the contributions can’t be retrieved or revoked if you need the money back since they will officially belong to the account-holding child.

How do in-trust accounts in Canada work?

In-trust accounts in Canada work in the following ways:

1. The donor makes contributions. The donor (the one contributing to the account) sets up the trust, names the trustee and beneficiary and transfers the assets. These can come in the form of cash, stocks, bonds, mutual funds, real estate, other property and investments.
2. The trustee handles investments. The trustee (who is often also the donor but may be a trusted relative or financial institution) manages the assets in the account on behalf of the beneficiary (the child) until the child reaches the age of majority in their province. The trustee manages the child’s investment portfolio and can make withdrawals on behalf of the child.
3. The beneficiary eventually gains control of the account. The beneficiary (the child named by the donor) can’t access or manage funds in the account until they reach the age of majority. At this point, they gain the same power to manage their investments as the trustee, with the goal of eventually taking full control of the account.

What’s the difference between a regular trust and an in-trust account?

The main differences between a regular trust and an in-trust account are outlined below:

Regular trusts	In-trust accounts
Has a trust deed that outlines essential components of a trust Requires extensive paperwork Typically drafted by a lawyer, therefore more expensive Much more likely to be seen as legitimate by the Canada Revenue Agency Clearly identified donor, trustee and beneficiary	No designated trust deed Less paperwork required Cheaper since you don’t need a lawyer to draft it May be rejected as a trust for tax purposes (which could cost you a lot of money in back taxes) Does not always require you to specify essential components of a legal trust

How can I meet the criteria of a legal trust?

You’re more likely to have your in-trust account accepted as a legal trust by the Canada Revenue Agency and other institutions if you create a certified document that outlines the following components very clearly:

1. Your intention to create a trust. You need to clearly state that the in-trust account will serve as a trust for the child.
2. The property that makes up the trust. You’ll have to identify what assets and investments you will hold in the trust.
3. The beneficiary of the trust. You’ll be required to testify that the child who holds the account is the beneficiary of the trust.
4. Where contributions are coming from. You’ll also want to make sure that you keep meticulous records detailing where contributions come from for tax purposes.

In-trust tax rules

As a donor for an in-trust account, you’ll pay taxes on any interest or dividends the account accumulates even though it is in your child’s name. However, there are a few exceptions that will allow you to split your income with your child. This means your child will be taxed (usually in a much lower income bracket) when they withdraw money from the account.

When can taxes be attributed to the child?

Taxes can be attributed to the child in the following circumstances:

1. Contributions come from the Child Tax Benefit payments or an inheritance.
2. The child contributes money to the account directly (through a summer job, allowance or birthday gifts, for example).
3. The income is generated from capital gains.

Can minors buy stocks in an informal trust?

Minors aren’t allowed to buy stocks directly in an informal trust since they aren’t legally allowed to enter into any type of financial contract in Canada. This means that investments can only be transferred into the trust by the parents and the investments will be held “in trust” for the child until they reach the age of majority in their province.

In-trust accounts vs RESPs

There are a couple of differences between in-trust accounts and Registered Education Savings Plans (RESPs) you should be aware of before you start saving for your child’s education. The biggest difference is that an RESP is specifically designed to save for post-secondary education and you’ll get free money from the government for every year you put funds away.

In-trust accounts can be used to save for a child’s education but the funds aren’t earmarked for this use. This means that once your child turns 18 or 19 (depending on the province), they can technically spend the money on whatever they want. You also won’t collect government grants on any money you save.

Quick breakdown: RESPs vs in-trust accounts

RESPs	In-trust accounts
Designed to save for your child’s post-secondary education Receives financial contributions from the government Can be withdrawn by parents (but will lose government contributions) Earns tax-free interest and dividends Maximum contribution of $50,000	No specific savings goal No financial contributions from the government Once in your child’s name, contributions belong to them and can’t be revoked Tax is attributed back to the donor in most cases No maximum contribution

What happens to an informal trust when your child turns 18?

When your child turns 18 or 19, they will be issued with the same level of control over the in-trust account as the trustee has. This means that they can help to manage investments and make withdrawals.

The trustee won’t automatically be removed from the trust when the child reaches the age of majority in their province. However, most trustees will begin the process of transferring the trust fully over to the beneficiary at this point.

Advantages and disadvantages of in-trust accounts in Canada

Advantages of an in-trust account

• Easy to set up. Unlike with a formal trust, you don’t need a trust deed to set up an account so the process is fast and easy.
• Cheaper than a formal trust. You won’t have to worry about paying lawyer fees to set up an in-trust account.
• Opportunity for income splitting. You may be able to defer taxes on certain income (such as on capital gains or interest made on Child Tax Benefit money).

Drawbacks of an in-trust account

• Not revocable. Your child will officially own the assets and investments you put into their accounts as soon as they transfer over (and you can’t take them back).
• Not always legally admissible. You may be charged back tax by the CRA if it decides that your in-trust account doesn’t meet the definition of a legal trust.
• No spending restrictions. You won’t be able to control how the beneficiary manages or spends the money in the account once they reach the age of majority.

Eligible investments for in-trust accounts in Canada

You can hold cash, fixed-income assets, equities, property and other investments in an in-trust account. Below are some examples of commonly held assets and investments.

Examples of in-trust investment options

Cash Mutual funds Exchange-traded funds Stocks

Bonds Guaranteed investment certificates (GICs) Real estate

Opening an in-trust account

You may be able to open an in-trust account at most major banks or with some private investment firms. You’ll need to ask your financial institution if this is an option, and find out how much you might have to pay in fees to get started.

You’ll likely need to fill out an application and submit the required documents to name your trustee and beneficiary. You should also prepare a separate document to show that you meet the criteria of a legal trust.

Compare providers to open an in-trust account

Bottom line

Opening an in-trust account can be cheaper and easier than opening a formal trust, but it may come with more risks. It pays to make sure you set very clear expectations for your in-trust account from the beginning – for example, by clearly identifying your trustee and beneficiary. If you’re worried about potential tax implications, you may want to spend the money to set up a formal trust.

Frequently asked questions

• Can minors buy stocks using an in-trust account?

  No. Minors can’t buy stocks since they aren’t allowed to enter into any kind of formal contract with a financial institution in Canada. For this reason, any stocks must be purchased by the donor and then contributed to the in-trust account through a transfer of assets.

• What is the minimum age to buy stocks in Canada?

  The minimum age to buy stocks in Canada is the age of majority in your province of residence. This may be 18 or 19 years old, depending on where you live.

• What is income splitting for tax purposes?

  Income splitting involves earning money from investments that you then attribute to the beneficiary. This can be beneficial for a parent who makes a high income and wants to attribute taxes to their child for certain investments to reduce their own tax load.

• Can I income split with a child if I set them up with an informal trust?

  This depends on the type of investments you make. You can attribute income to your child when you make investments with money that your child earns, money you get from the Child Tax Benefit or a child’s inheritance. You can also split income on any investments that earn capital gains. It’s not allowed if you use your own money to invest and the investments earn interest and dividends.

• Is an informal trust just as good as a formal trust?

  Yes and no. Formal trusts have more legal backing if you’re dealing with large amounts of money because they come with a trust deed that’s written up by a lawyer. Informal trusts may be a good fit for you if you’re dealing with a smaller amount of money and you want to save money on legal fees.