14 April 1999 External T.I. 9829145 - HOW ARE IN-TRUST ACCOUNTS TAXED?

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 taxed?

Position:

Depends on facts of case.

Reasons:

If the three certainties are present, tax as trust. I.e. The attribution rule of subsection 74.1(2), subject to subsection 74.3(1), may apply with respect to income, but (pursuant to 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 not a trust but a gift, attribution of income (or losses) but not taxable capital gains (or allowable capital losses).

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

XXXXXXXXXX 						982914
T. Murphy
April 14, 1999

Dear XXXXXXXXXX:

Re: XXXXXXXXXX T5 Statements
Proper Reporting of Capital Gains Dividends "in trust" for Minor Children

This is in reply to your letter of November 4, 1998 concerning the proper reporting of capital gains dividends received in trust for minor children. We apologize for the delay in responding to your letter.

As described in your letter, funds have been invested in various mutual fund corporations in trust for your three minor children. T5 slips are issued in your name in trust for the children. You state: "...the income reported in each T5 is deferred until the children assume the trust at age 18, at which time they will be subject to the income earned. Because of this, I have not included the amounts reported as income on my return."

You have asked for confirmation that this is in fact the proper reporting of the capital gains dividends. Additionally, you ask whether the children can submit tax returns now, as minors, reporting the income now, rather than when it is drawn out of the trust when they assume it at age 18.

Because this involves a completed transaction, the local tax services office is responsible for its review and the determination of the proper tax reporting. 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 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. 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 formal 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 Income Tax Act (the "Act") deals with attribution of income and losses. As noted in the enclosed copy of Interpretation Bulletin IT-510, Transfers and Loans of Property Made After May 22, 1985 to a 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 child, 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. 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 to a related minor child, 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. A copy of Interpretation Bulletin IT-369R, Attribution of Trust Income to Settlor, and a Special Release to that bulletin are enclosed for your reference.

Under paragraph 131(1)(b) of the Act, where a mutual fund corporation has elected to treat dividends payable to shareholders as capital gains dividends, the dividends are deemed to be capital gains of the shareholders rather than dividends. Under the Act, 75% of a capital gain is a taxable capital gain and required to be included in income.

If we assume that there is a trust but that subsections 74.3(1) and 75(2) of the Act are not applicable, the taxable capital gains would be included either in the income of the trust or the children depending upon the terms of the trust. They would be included in the income of the children if:

1) the terms of the trust are such that the income and 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 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 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 income and gains would be taxed in the trust. Under the Act, a trust is treated as a separate person and the income, including gains, of the trust is generally determined in the same way as any other 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 (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.

Trustees of trusts are generally required to file a trust return ("T3") annually with respect to each trust of which they are the trustees. See page 10 of the enclosed copy of the 1998 T3 Guide and Trust Return.

In response to your question on filing, generally there is no requirement for an individual to prepare and file an income tax return (the "T1") with respect to income and taxable capital gains where there would be no tax payable by the individual.

We trust our comments will be of assistance to you.

Yours truly,

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

Enclosures