Informal trust accounts: How they do and don’t work

By Carol Bezaire | June 19, 2018 | Last updated on September 21, 2023
5 min read
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Informal trusts, or ITFs, are a tax-efficient way to provide a savings plan for a minor child and, occasionally, an adult. These accounts can be used for funding future education, protecting an inheritance or, as is often the case, tax savings for the contributing adult. As an advisor, it’s important to focus on the purpose and tax implications when clients set up an ITF.

The parties

For clarity, let’s define who the parties usually are when an ITF account is established. Both informal trusts and formal trusts have three distinct parties: the settlor or contributor, the beneficiary and the trustee.

Contributor—usually the adult(s) making a gift or contributing assets to a minor child. In a formal trust, this individual would be called the settlor.

Beneficiary—the individual who benefits from account assets. This is usually a minor child related to the contributor. The beneficiary, not the contributor or trustee, is always the ultimate owner of the assets.

Trustee—the ITF account holder on behalf of the minor beneficiary until age of majority is reached. In a formal trust, the trustee oversees all trust account activity and is responsible for trust tax reporting. The trustee can hold the assets on behalf of a beneficiary for any period of time as stipulated by the settlor (e.g., lifetime of the beneficiary).

The characteristics

A formal trust is usually created by a legal document referred to as a deed of trust. The ITF is informal, as its name suggests, with no deed of trust required. The investment contract with an ITF account designation is the only document detailing the trust relationship. The only exception to this is when an inheritance under a will is subsequently invested for a minor child or grandchild.

For example, the will may stipulate that the child cannot access the inheritance until, say, age 21. Often, an ITF account is used if the inheritance is less than $250,000, but in most provinces, the will takes precedence over the rules for the standard ITF account. This wouldn’t be the case in Quebec, however, where legislation requires that the beneficiary take ownership of ITF assets upon reaching age 18.

When establishing an ITF account, it’s important to advise the parties to complete the application properly. The beneficiary and trustee must be clearly identified to support the trust relationship. Usually, the trustee’s social insurance number is used on the account so that investment income can be allocated to the correct taxpayer.

Also, Canada Revenue Agency (CRA) looks for the contributor and trustee to be different individuals. Otherwise, the agency may, under Section 75 (2) of the Income Tax Act, attribute all investment income to the trustee for tax purposes, and disallow income splitting between the contributor and related beneficiary because they’re not acting at arm’s length. Related beneficiaries include children, grandchildren, and nieces and nephews, among others related to the contributor. Under the act, income includes interest, dividends and foreign dividends.

There are some exceptions to income splitting. If the assets in the ITF account are provided solely by Canada Child Tax Benefit payments, an inheritance or allowance, all income would be attributed and taxable to the beneficiary, not the trustee. Also, realized capital gains are attributed to the beneficiary in most cases.

The pitfalls


ITF accounts don’t have a trust deed, but they’re still legal and valid trusts. Thus, contributing funds to an ITF account is irrevocable, and account withdrawals must be used for the child’s benefit until age of majority is reached.

Sometimes, a contributor (typically a parent) no longer wants to give funds to the beneficiary due to changed circumstances with the child, so they collapse the ITF account and take back the money. This could have serious consequences. In such cases, CRA deems that control of ITF assets remains with the contributor, and therefore the agency often attributes all income from the ITF’s inception—including capital gains—to the contributor. This can result in back taxes and penalties for the contributor.

A landmark case, Koons v Quibell, illustrates how seriously the ITF is considered in court.

The case involves a second wife who set up two ITF accounts for her late husband’s grandchildren, as she felt bad that they weren’t mentioned in their grandfather’s will.

The accounts were set up with each grandchild to receive the account at age 18. When the first grandchild turned 18, he received his account from the contributor. However, before the second grandchild turned 18, the contributor changed her mind and cashed in the account, using the funds for her own family. The court subsequently awarded the beneficiary grandchild the amount of the account plus interest, on the grounds that the ITF account had been set up properly, thereby making the gift to the grandchild irrevocable.

Consequences at death

If the contributor dies while the ITF account is in place, attribution ceases and all investment income earned in the account is taxed in the beneficiary’s hands.

If the trustee dies, the trustee’s executor will look to the trustee’s will to see if a replacement trustee has been named. If not, the account could remain in the estate’s name until the beneficiary reaches the age of majority. This could result in the trustee of the estate and the beneficiary differing on how the ITF will be invested and when the funds will be paid to the beneficiary.

If the beneficiary dies, the assets in the ITF account will be distributed under the provincial and territorial rules of intestacy because minors in most jurisdictions aren’t legally entitled to draw a will.

ITF accounts can offer great opportunity for investing for a minor child, as well as income splitting with the contributing adult. Every situation is unique, so work with your clients to clearly identify the purpose and explain the facts of these accounts.

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Carol Bezaire

Carol Bezaire , PFPC, TEP, CLU, is the vice-president of tax and estate planning at Mackenzie Investments. Carol can be contacted at: