7 June 1999 External T.I. 9833995 - FILING REQUIREMENTS FOR IN-TRUST ACCOUNTS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Are trust returns required for in-trust accounts where subsection

75(2) is not applicable?

Position:

Generally, yes.

Reasons:

Where there is a trust, returns are required pursuant to paragraph 150(1)(c) of the Act and subsection 204(1) of the Regulations, subject to the administrative position set out in the T3 Guide.

XXXXXXXXXX			983399
T. Murphy
Attention:  XXXXXXXXXX

June 7, 1999

Dear Sirs:

Re: Filing Requirements for In-Trust Accounts

We are writing in reply to your letter of December 18, 1998, concerning filing requirements for in-trust accounts, the beneficiary of which is a minor. In your letter you state that, while lacking certain formalities, the accounts have all the characteristics of an irrevocable trust. Your query concerns the situation where income earned is reported by the parent until the year in which the child turns 18 pursuant to subsection 74.1(2) of the Income Tax Act (the "Act"), and capital gains are reported by the child. Your understanding is that a trust return ("T3 return") is required where the trust has disposed of property based on the comments in the T3 Guide and Trust Return (the "T3 Guide"). However, you advise that some clients have been informed by the institutions with whom they have set up accounts that a T3 return is not necessary as long as there is only one beneficiary.

We offer the following general comments for your consideration.

It is not clear whether the in-trust accounts are trusts for income tax purposes. The existence of a trust is determined by the relationship between the settlor, the trustees and the beneficiaries. The relationship may or may not be defined by a formal written document but is determined by any applicable trust legislation and common law. It is accepted at law that a trust cannot be established unless three certainties are present.

That is, the attempt to establish a trust will fail unless it is certain that the settlor intended to bring a trust relationship into existence and both the property and the beneficiaries of the trust are described with sufficient certainty. Whether the three certainties are present or not is a question of fact and particular to the circumstances of each case; however, given the requirement of these three certainties, a written trust document would serve as the best evidence of their existence and would resolve any ambiguities which may otherwise arise. The certainty of intention is established where it is clear that a trust relationship was intended as opposed to some other relationship such as an agency. The property or property substituted therefor must be clearly identifiable in order for the certainty of property to exist. Lastly, to create a valid trust, the beneficiaries must be identifiable.

Where an in-trust account is opened by a parent for his or her children, in absence of a written trust document, the certainty of intention to set up a trust would be a difficult one to prove. As the children involved are most likely minors, often the arrangement is designed to accommodate the fact that minors do not have the legal capacity to enter into legally binding contracts and hence purchase financial instruments in their own name.

Section 74.1 of the Act deals with attribution of income and losses. Subsection 74.1(2) of the Act generally provides that where an individual (in this case the parent) has transferred or loaned property (including money) to a related minor, any income or loss for a taxation year from the property or property substituted therefor is deemed to be income or loss of the parent. An exception is made for a minor who has attained the age of 18 years before the end of the year. Where the transfer or loan is made to a trust in which the minor is beneficially interested at any time, subsection 74.3(1) of the Act in conjunction with subsection 74.1(2) of the Act provides that the income earned by the trust on such transferred or loaned property that would otherwise be reported by the minor is deemed to be income of the parent. The income that would otherwise be reported by the minor is the income that is payable to the minor within the meaning of subsection 104(24) of the Act or deemed to be payable to the minor pursuant to subsection 104(18) of the Act. To the extent that these provisions are not applicable, the income would generally be subject to tax in the trust. Section 74.2 of the Act, which deals with attribution of taxable capital gains and allowable capital losses, does not apply to attribute such gains and losses of a related minor, whether or not the arrangement constitutes a trust.

However, in addition to the above-noted provisions of the Act, subsection 75(2) of the Act provides that where property in a trust is held on condition

"(a) that it or property substituted therefor may

(i) revert to the person from whom the property or property for which it was substituted was directly or indirectly received (in this subsection referred to as "the person") , or

(ii) pass to persons to be determined by the person at a time subsequent to the creation of the trust, or

(b) that, during the lifetime of the person, the property shall not be disposed of except with the person's consent or in accordance with the person's direction,..."

any income earned by the trust on the property or property substituted therefor and any taxable capital gains from the disposition of the property or property substituted therefor is deemed to be that of the person (in this case the parent) while the person is alive and resident in Canada.

Therefore in order to avoid the application of subsection 75(2) of the Act, the powers entrusted in the parent contributing the property to the trust must not include any of the conditions listed.

If we assume that there is a trust but that subsection 75(2) of the Act is not applicable, then depending on the terms of the trust, the income (excluding taxable capital gains) would be included in the income of the trust or the parent as explained above. Additionally, depending on the terms of the trust, taxable capital gains would be included in the income of the trust or the children. Taxable capital gains would be included in the income of the children if:

1) the terms of the trust are such that the taxable capital gains are payable to the children each year, or

2) the conditions of subsection 104(18) of the Act are met.

Subsection 104(18) of the Act applies where the following conditions are met: (a) the income (including taxable capital gains) has not become payable in the year; (b) the individual is less than 21 years of age at the end of the year; (c) the individual's right to the income (including taxable capital gains) is vested by the end of the year otherwise than because of the exercise or the non-exercise of a discretionary power; and (d) the individual's right is not subject to any future condition (other than a condition that the individual survive to an age not exceeding 40 years).

If (1) and (2) above are not applicable, the taxable capital gains would be subject to tax in the trust.

Trustees of trusts are generally required to file a T3 return annually with respect to each trust of which they are the trustees in accordance with paragraph 150(1)(c) of the Act and subsection 204(1) of the Income Tax Regulations and as further explained on page 10 of the 1998 T3 Guide. In particular, as set out therein, the trustee would be required to file a T3 return in any year where the trust has disposed of capital property regardless of the number of beneficiaries of the trust.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R3.

Yours truly,

R.S. Biscaro, CA
Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch