22 September 1997 External T.I. 9717475 - 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 In-trust accounts trusts?

Position:

Depends on facts of case

Reasons:

if three certainties are present yes...otherwise no.

971747
XXXXXXXXXX L. Holloway

Attention: XXXXXXXXXX

September 22, 1997

Dear Sirs:

Re: In-Trust Accounts

This is in reply to your letter of May 22,1997, concerning the tax treatment of "in-trust accounts" typically set up for holding mutual fund investments on behalf of minor children. We acknowledge the excerpts from publications by various funds in promotion of such accounts and we offer the following comments.

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 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. 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 or other objects 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, or a transfer, or gift of property is intended. The property, or property substituted therefor must be clearly identifiable in order for that certainty to exist. Lastly, in creating 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 formal trust document, the certainty of intention to set up a trust arrangement 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. Thus, the arrangement may be one akin to agency as opposed to a trust.

As discussed in Interpretation Bulletin IT-510, "Transfers and Loans of Property made after May 22, 1985 to a Related Minor", subsection 74.1(2) of the Income Tax Act generally provides that where an individual, in this case the parent, has transferred or loaned property (including money) to a related minor or to a trust in which a minor is beneficially interested at any time, any income or loss from the property or property substituted therefor is deemed to be income or loss of the parent for a taxation year. An exception is made for a minor who has attained the age of 18 years before the end of the year. Taxable capital gains or allowable capital losses arising from a subsequent disposition of the transferred property or property substituted therefor, do not attribute to the parent under subsection 74.1(2) of the Act.

With respect to trusts, subsection 75(2) of the Act also 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 section 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 or capital gains earned by the trust on the property or property substituted therefor, is deemed to be that of the person, in this case the parent, while the parent is alive and resident in Canada. Therefore the powers entrusted in the parent should not violate the conditions listed to avoid the application of subsection 75(2).

While we trust our comments will be of assistance to you, as stated in paragraph 22 of Information Circular 70-6R3, they do not constitute an advance income tax ruling and, accordingly, they are not binding on Revenue Canada.

Yours truly,

T. Murphy
A/Section Chief
Resources, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch