November 2, 2023

What you should know before investing in an ITF Account for your child/grandchild

An in-trust for (ITF) account is a convenient and popular tool for parents, grandparents and other adults to set aside funds for minor children. It can:

  • Allow the account holder to make investment decisions on behalf of minor beneficiaries
  • Enable the splitting of income for tax purposes
  • Protect assets for a child
  • Help inheritance arrangements as minors cannot directly accept a gift under a will

What is a trust?

A trust outlines a relationship between three different parties, each with a specific role:

  • A settlor: Transfers property to the trust and appoints a trustee
  • A trustee: Has legal ownership of the property for the benefit of the beneficiaries
  • A beneficiary: Is the beneficial owner of the property

For a trust relationship to exist, there must be proof of three certainties:

  • Certainty of intention to establish the trust
  • Certainty of trust property (subject)
  • Certainty of beneficiaries (object)

How is an ITF account taxed?

Contributions made to an in-trust account are not tax-deductible. However, the contributor to the account can divide some of the taxable income with the beneficiary. Typically, all interest and dividend income is taxable in the hands of the contributor, and all capital gains are taxable in the hands of the beneficiary.

There are some exceptions:

First, if the contributor is also the trustee or if the account has been otherwise set up so that the assets can only be disposed of by direction of the contributor, then all of the income may be taxable in the contributor’s hands.

Second, if the funds in the in-trust account are solely derived from Canada Child Tax Benefit payments – or an inheritance – all of the income is taxable in the hands of the child.

Lastly, secondary income (income earned on the income already generated by the original investment) is again taxable entirely in the hands of the child.

Once the child reaches the age of majority, all of the income is taxed in his or her hands. Note that the trustee is responsible for filing annual T3 trust returns to report income.


A note on inheritances

If an ITF account is set up to pass an inheritance to a minor beneficiary under a will, the terms of the will determine when the assets pass from the trust to the beneficiary, so the trust may be distributed to the beneficiary at date later than when the beneficiary reaches the age of majority. The one exception is for residents of Quebec, where the beneficiary is required to take ownership of the ITF assets at age 18.

Attribution rules

The attribution rules of the ITA prevent income splitting with spouses and minor children where property is gifted to these family members directly or indirectly through a trust. With respect to minors, attribution applies to first generation income, but not to second generation income, income from third parties or capital gains. Where attribution applies, the income is taxed in the hands of the contributing adult as opposed to the minor child. Attribution does not apply to gifts under a will.

When is an in-trust account a good idea?

Many people choose ITFs because they allow the money withdrawn to be used for any purpose. For example, children can use the account to pay for education, or something entirely different when they reach the age of majority.

Alternative strategies

Before opening an ITF account, consider discussing these alternatives:

  • Open an RESP for the child or grandchild. This will give the contributor (known as a “subscriber” in the context of an RESP account) increased control over spending of the funds once the minor reaches the age of majority, and the subscriber will receive the added benefits of the Canadian Educations Savings Grant.
  • Help to pay for your children and grandchildren’s expenses while you are still alive. This could consist of helping out with payments for ballet or soccer lessons, or even something as large and meaningful as helping with the purchase of their first home.
  • Set up a formal trust that benefits the children or grandchildren and lend money into the trust at a prescribed rate of interest. This arrangement allows for income-splitting without the risks associated with an informal trust while creating greater certainty.
  • Take out a life insurance policy that benefits the children or grandchildren.
  • Contribute to your children or grandchildren’s Tax Free Savings accounts once they reach the age of majority.

Final consideration

Whether an ITF account or the above alternatives are the best depends on a variety of different factors including the resources, goals, and objectives of all parties involved. When considering whether to set up an ITF or a formal trust, seek the assistance of legal counsel and a financial advisor for more information.

This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth isa trademark and business name under which iA Private Wealth Inc. operates.