The Canadian Government has implemented new conditions for In Trust For accounts. Unless specific conditions are met, ITF holders must file a T3 return for tax years ending after December 30, 2023. This includes many trusts, including bare trusts.
Before the introduction of the new reporting requirements, a trust that did not earn income, dispose of capital property, or make distributions of income or capital in a year was generally not required to file an annual return.
For this article, we have assumed that the ITF account was established with the intention that the account holder is acting as an agent or guardian of the property for a particular person or persons. If this is not the case, then the tax consequences could be very different. Let’s review this.
The Benefits: In Trust For Accounts
An in-trust for (ITF) account is a great tool for parents and other adults looking to set aside funds for minor children. Some of the benefits include:
- Allowing the account holder to make investment decisions on behalf of minor beneficiaries
- Potentially enabling the splitting of income for tax purposes (specific rules apply)
- Allowing capital gains to be taxed in a child’s hands
- Protecting assets for the child
- Smoothing inheritance arrangements since minors cannot directly accept a gift under a will
The Basics: ITFs
If a parent or guardian opens an ITF, trustees can make contributions or investments with no limits on the child’s behalf. Until the child reaches the age of majority in their province, any withdrawals must be used for their benefit only, otherwise Canada Revenue Agency will consider the account to be the parent’s account and the parent will have to pay the tax on all of the income and capital gains. Once the beneficiary reaches the legal age of majority in their province, they are entitled to the account’s proceeds.
ITFs and Tax
If an “In Trust For” account holds assets with fair market value of more than $50,000 at any point during the year, then the “In Trust For” account must file a trust tax return (T3 return) for the calendar year ended December 31, 2023. Such a trust return would be due by March 30, 2024. This would be an information return only, without reporting any income or capital gains, because the account is considered to be a bare trust.
If the ITF account is held for minor children and funds were contributed by family members, then any interest and dividend income earned in the “In Trust For” account must be reported by the contributor of the funds. Capital gains realized in the account are reported on the child’s personal tax return, along with any interest and dividend income that was derived from funds that were received directly by the child from sources such as an inheritance or insurance proceeds.
The trust return must include information on the settlors, trustees, and beneficiaries of the “In Trust For” account. The information includes the name, address, date of birth, jurisdiction of residence, and tax identification number for each person or entity.
Not sure your ITF meets the required criteria? Contact us at Lott & Company and we can assist you in filing the T3 return.
