27 March 2001 External T.I. 2001-0067745 - IN-TRUST ACCOUNTS FOR MINORS

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: How are in-trust accounts for minors taxed

Position: Depends on the facts

Reasons: If the three certainties are present, tax as trust. Attribution under subsection 74.1(2), subject to subsection 74.3(1), may apply with respect to income. Under section 74.2 taxable capital gains are not subject to attribution. Subsection 75(2) could apply with respect to income (or losses) or taxable capital gains (or allowable capital losses).

If there is no trust but there is a gift, there is attribution of income (or losses) but not taxable capital gains (or allowable capital losses).

If there is neither a trust nor a gift, tax in parent's hands since there would be no transfer of property.

XXXXXXXXXX 2001-006774
S. Parnanzone, MBA, CMA
March 27, 2001

Dear XXXXXXXXXX:

Re: In-trust Accounts for Minors

This is in reply to your letter of October 31, 2000, addressed to the Surrey Tax Centre, concerning the informal trust account you opened for your son, a minor, with XXXXXXXXXX. Informal trust accounts are described in XXXXXXXXXX letter of September 26, 2000, which you enclosed with yours, as follows:

XXXXXXXXXX.

With your letter, you also enclosed a copy of XXXXXXXXXX statement for the account, which covers the period from XXXXXXXXXX. The statement indicates that the funds are invested in mutual funds units and that the account generated Canadian interest and dividends as well as capital gains and losses.

Your first question concerns who is required to report the capital gains and losses and the interest and dividends generated by the in-trust account.

Your second question is whether you as a parent can use the funds in the in-trust account for your son's benefit and whether there are rules regarding your access to the said funds.

Our comments

The particular circumstances in your letter on which you have asked for our views deal with a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling, if the transactions are proposed and not yet undertaken. However, we are prepared to offer the following non-binding general comments.

The Income Tax Act (the "Act") contains rules dealing with situations where an individual, in this case a parent, transfers or loans property (including money) to a related minor. These rules also deal with situations where the transfer or loan of property is made indirectly through a trust for the benefit of the minor. Whether or not a particular arrangement involving an in-trust account is considered a trust at law is, as explained below, a question of fact.

The existence of a trust is determined by the relationship between the settlor, the trustees and the beneficiaries. The relationship, which may or may not be defined by a formal written document, is codified by any applicable trust legislation and common law. It is accepted at law that a trust cannot be established unless three certainties are present, namely the certainty of:

• the intent to create a trust;
• the property to be placed in trust; and
• who the beneficiaries of the trust are.

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, or a transfer, or gift of property. The property, or property substituted therefor, must be clearly identifiable in order for the certainty of property to exist. Lastly, in creating a valid trust, the beneficiaries must be identifiable.

Whether these three certainties are present is a question of fact, which can only be determined on a case by case basis. However, given the requirement of these three certainties, a written trust document would serve as the best evidence of the existence of a trust and would resolve any ambiguities which may otherwise arise.

Where an in-trust account is opened by a parent for his or her children, in absence of a formal trust document, the certainty of intention to set up a trust arrangement would be difficult to prove. On the basis that the children are minors, the in-trust account arrangement is generally designed to accommodate the fact that minors do not have the capacity to enter into legally binding contracts and purchase financial instruments in their own name. Thus, the arrangement may be one akin to agency as opposed to a trust.

Section 74.1 of the Act deals with attribution of income and losses, which is a subject discussed in Interpretation Bulletin IT-510, Transfers and Loans of Property Made After May 22, 1985 to Related Minor. 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. This attribution rule does not apply to the income earned on property received by a minor as a consequence of the transfer of Canada Child Tax Benefits paid under subsection 122.61(1) of the Act. Also, the attribution rule does not apply in the case where the minor has attained the age of 18 years before the end of the year.

Where the transfer or loan of property 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 (e.g., dividends and interest) 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 amount of 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 there is a trust (i.e., in this case, whether or not the in-trust account arrangement constitutes a trust).

However, in addition to the above-noted provisions of the Act, another tax rule may apply in the case of a trust. 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 an in-trust account that qualifies as a trust at law must not include any of the conditions listed. Subsection 75(2) is discussed in Interpretation Bulletin IT-369R, Attribution of Trust Income to Settlor.

If it is assumed that the in-trust account is a trust and 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.

On the other hand, if (1) and (2) above are not applicable, the taxable capital gains would be subject to tax in the hands of the trust.

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).

We would mention that a trust is taxed as an individual. A trust is not, however, entitled to claim any of the personal tax credits (e.g., basic personal or spousal amount). Inter vivos trusts, which are those created during the lifetime of a person, are subject to tax at the highest marginal rate. Net income remaining after payment of taxes would form part of the capital of the trust. Generally, amounts of trust capital can be distributed to Canadian resident beneficiaries on a tax-free basis.

We would also note that section 120.4 of the Act provides for a special tax on split income. For the 2000 and subsequent taxation years, subsections 74.1(1) and (2), 74.3(1) and 75(2) of the Act will not apply to any amount that is included in computing the split income for a taxation year of a specified individual, generally a minor. Split income is a defined term. Although one of the items of this income includes taxable dividends in respect of shares of corporations, it excludes dividends on shares of a class listed on a prescribed stock exchange or shares of mutual fund corporations.

As regards your second question, it is unclear whether you may be referring to comments made in Income Tax Technical News No. 11. We have enclosed a copy of the newsletter for your information. It should be noted, however, that it does not appear that the comments in the newsletter apply to your situation, as they apply to a discretionary trust and where the attribution rules do not apply. We would also mention that the Act, which Canada Customs and Revenue Agency is responsible to administer, generally deals with taxation matters affecting transactions undertaken by taxpayers. Accordingly, you may wish to discuss contractual arrangements regarding access to the funds in the in-trust account for your son with officials of Altamira or your legal advisor.

You can find the publications mentioned above at www.ccra-adrc.gc.ca on the Internet.

We trust that the foregoing comments are of assistance.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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