8 June 2007 Roundtable, 2007-0233761C6 - 2007 STEP Conf-Q.1-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.

Principal Issues: What is the CRA's view of in-trust accounts and how does it determine the nature of the account?

Position: The CRA's position has consistently been that the determination of the nature of an "in-trust" account has to be made on a case by case basis in light of the specific facts. The legal relationship between the parties must be determined before applying the Act

Reasons: For tax purposes, no distinction is made between a formal trust and an informal trust except that it is typically more difficult to establish whether an informal trust is in fact valid. As noted in the question, the three certainties must be present in order for a trust relationship to be established. It will often be very difficult for the person creating the trust - typically a parent of the child - to prove that the three certainties are met unless the creation of the trust has been clearly documented. While the CRA recognizes that a formal trust deed is not required in order to establish a trust, a parent who wants a reasonable degree of certainty as to whether the CRA will agree that a trust has been established for the child would be well advised to set out the terms and conditions of the trust in a formal trust deed and to handle the trust funds in accordance with the terms and conditions so established.

2007 STEP Round Table

Q. 1 In-trust Accounts

In-trust accounts can be agency arrangements, true trusts or neither, in that the assets remain the property of the transferor. The existence of a trust depends upon the relationship between the settlor, the trustees and the beneficiaries and whether the three certainties are present, namely certainty of the settlor's intention to create a trust, the property placed in trust and the beneficiaries of the trust. What is the CRA's view of in-trust accounts and how does it determine the nature of the account?

Response

There is a great deal of uncertainty and\or misinformation concerning "in-trust accounts". The CRA's position has consistently been that the determination of the nature of an "in-trust" account has to be made on a case by case basis in light of the specific facts, but we continue to receive a steady flow of enquiries about the status of such accounts for tax purposes. The legal relationship between the parties must be determined before applying the Income Tax Act (the "ITA"). Some financial institutions have issued bulletins and leaflets explaining what a trust is and the benefits of creating a trust for the benefit of minors. Some promotional documents make a distinction between a formal and an informal trust, emphasizing that a formal trust is usually drafted by a lawyer and indicates how the assets are to be administered, the duration of the trust and how the assets are to be distributed whereas an informal trust is only documented by the investment contract.

For tax purposes, no distinction is made between a formal trust and an informal trust except that it is typically more difficult to establish whether an informal trust is in fact a valid trust. As noted in the question, the three certainties must be present in order for a trust relationship to be established. It will often be very difficult for the person creating the trust - typically a parent of the child - to prove that the three certainties are met unless the creation of the trust has been clearly documented. While the CRA recognizes that a formal trust deed is not required in order to establish a trust, a parent who wants a reasonable degree of certainty as to whether the CRA will agree that a trust has been established for the child would be well advised to set out the terms and conditions of the trust in a formal trust deed and to handle the trust funds in accordance with the terms and conditions so established. If there is a trust, a T3 return will typically be required.

If the arrangement is not a trust, what is it? In some cases, the courts have concluded that there was an immediate gift of the property and in other cases, the courts have concluded that the property continued to be part of the assets of the purported transferor. The actions of the adult who has signing authority on the account in dealing with the property will be relevant in determining which applies. Two recent Supreme Court cases dealing with estate litigation, Pecore v. Pecore (2007 SCC 17) and Madsen Estate v. Saylor (2007 SCC 18), highlight the importance of documenting the transferor's intent. CRA document 2002-017676 provides an in-depth analysis of some of the issues to be considered in determining the nature of an in-trust account.

If the nature of the arrangement is such that no trust is established and the facts, including the manner in which the parent handles the account, indicates that no actual transfer of property has been made to the child, the income from the in-trust account would remain that of the parent who transferred the funds to the in-trust account.

If the in-trust account represents an actual transfer of property to the child at that time the property is deposited to the account, such that the parent acts solely as the child's agent or guardian of the child's property, the income from the account will be that of the child, subject to the application of the attribution rules.

With respect to the attribution rules, where the funds are held in a trust, there will typically be a concern with subsection 75(2) or section 74.3 of the ITA, and a concern with subsection 74.1(2) of the ITA if the funds have been transferred to the child directly with the parent acting as agent, guardian of the child's property or as a joint account holder. Where the funds deposited to the in-trust account are limited to the amounts received as a child tax benefit or a universal child care benefit, the attribution rules in subsection 74.1 and 74.3 of the ITA will not apply.