Offices in Ottawa and Perth
(613) 722-1500

CONTACT US (613) 722-1500

In-Trust For Accounts: No Good Deed Goes Unpunished

In-Trust For Accounts: No Good Deed Goes Unpunished

By:

Posted September 23, 2021

In-Trust For Accounts have become a common way for parents and grandparents to set aside money to finance their children or grandchildren’s post-secondary education. A parent or grandparent simply opens up an account at a financial institution for the benefit of their child or grandchild for educational expenses, with no formal written trust deed in place. Over time, the account balance grows in value as the parent or grandparent continues to make contributions to the account and the income and gains accumulate.  Unfortunately, tax and legal advice is not sought when a parent or grandparent sets up an in-trust for account, resulting in many tax and legal consequences.

Legally, in the absence of a written trust agreement in place, an in-trust for account is considered an invalid trust. This can have serious tax consequences on the parent or grandparent who set up the trust. However, even if an in-trust for account is considered a valid trust in some instances, many of the same tax and legal problems may still arise. These include:

  1. Enforce distribution: The child or grandchild, upon attaining the age of majority (which is 18 in Ontario), is entitled to enforce distribution of the account proceeds. Arguably, this is contrary to the intentions of the parent or grandparent who intended for such money to be used exclusively for the child’s education;
  2. Attribution rules: The attribution rules under the Income Tax Act may apply. This would result in all of the income including the capital gains earned in the account to be taxed in the hands of the parent or grandparent who contributed to the account;
  3. Trustee duties: The parent or grandparent still owes a duty to the child, even in the absence of a written trust agreement, which includes: duty to act in the best interests of the child, duty to not benefit personally from the money in the account, duty to comply with the prudent investor rule, duty to provide information to the beneficiaries and prepare annual tax returns, and a duty to be impartial;
  4. Income taxed in the trust: CRA treats any income accumulated in the account and not paid or made payable to the child is taxable in the trust at the highest marginal rates of tax, under the Income Tax Act; and
  5. 21-year rule: Finally, there is a deemed disposition of all capital property in the account every 21-years, resulting in a realization of capital gains or losses.

What may seem as an easy planning technique to set aside money for your child or grandchild’s education may result in grave consequences to you, as the contributing parent or grandparent.  As such, if you are considering opening up an in-trust for account or have already set one up, it is important to seek the necessary tax and legal advice as soon as possible. As they say, no good deed goes unpunished, especially when we are dealing with serious and unintended tax implications.

This blog post was written by Sarah Macaluso, a member of the Wills and Estates team. Sarah can be reached at 613-369-0374 or at sarah.macaluso@mannlawyers.com.

More Resources

Blog |
Wills, Trusts and Estates
By: 

Posted May 14, 2024

This is often a question that arises when someone dies with debts and the estate trustees  are at a loss as to what to do[...]
Blog |
Business Law
By: 

Posted May 9, 2024

Every story has to start somewhere. When buying or selling a business, the journey usually begins with a well drafted letter of intent. A letter of[...]
Blog |
Wills, Trusts and Estates
By: 

Posted April 23, 2024

In this day and age, social media is at the forefront of everything – it’s where people obtain news, it’s where people spend numerous hours[...]
Blog |
Wills, Trusts and Estates
By: 
Clients frequently ask how often they should update their Wills. We generally suggest that when clients sit down to do the oh so fun task[...]
Blog |
Real Estate
By: 
A tax sale is a sale process used by a municipality, in order to recover property tax arrears that have remained outstanding for at least[...]
Blog |
Wills, Trusts and Estates
By: 

Posted March 21, 2024

If someone wishes to make a Will or appoint a Power of Attorney, they must have the requisite capacity. The determination as to whether someone[...]
Sarah Macaluso

Sarah Macaluso

I practice exclusively in the areas of wills and trusts, incapacity planning, and estate administration. With every matter, I take the time to understand my clients’ wishes and needs and guide them through the estate planning process. I carefully explain complex options to clients and find solutions that preserve wealth and family harmony. In my estate administration practice, I assist individual and institutional executors with probating wills, administering estates, and preparing estate accounts.  I also regularly advise executors, trustees, and attorneys of their fiduciary duties. Born and raised in Hamilton, Ontario, I hold an honours degree in Business from McMaster University (summa cum laude) and a law degree from the University of Ottawa (cum laude). I was called to the Ontario bar in 2018.  Before joining Mann Lawyers in June 2020, I practiced in wills and estates with a mid-sized Ottawa firm. I currently sit on the Board of Directors of Villa... Read More

Read More About Sarah Macaluso

Subscribe to Our Newsletter

"*" indicates required fields

Name*
Consent*
This field is for validation purposes and should be left unchanged.