“in-trust” accounts may be simple and effective, they are also dangerous if not given due care and attention.
Maroney on Money for November 29, 1998
In order for the income to be reportable by a child, the capital invested must clearly belong to the child. The Child Tax Benefit is a good source of funds that can be legitimately invested to create income reportable by the recipient child for tax purposes.
If you’ve set up an “in-trust” account, say a bank account, to generate income taxable to your child you need to be very careful not to taint the investment. Tainting occurs when mom or dad decide to top-up junior’s investment with their own money. This applies to investments yielding interest or dividend income. Mixing funds is bad news because you’ve lost the ability to trace the source of the invested capital back to the child. You’ve also lost your ability to split income – any income received on the investment will become taxable to the contributing parent from that point on. Ouch! So no matter how tempting it may be, don’t embellish junior’s investment with your own funds.
Unlike interest or dividend producing investments, tainting is not an issue where the invested funds produce nothing but capital gains. That is, unless you run afoul of the so-called reversionary trust rules I described last week. Recall that a reversionary trust is a trust in which the contributor (e.g., a parent) gives an asset to someone (e.g., a child) but retains the right to take it back. Reversionary trusts are not effective income splitting tools since Revenue Canada basically ignores them and simply taxes the income in the contributor’s hands – interest, dividends and capital gains, alike.
This leads to one of the more significant limitations of “in-trust” accounts. It’s all fine and dandy to buy mutual fund units for junior while he or she is too young to understand the power of money but what about when junior comes of age? A child who attains the age of majority (18 in B.C.) is a child who can decide how that nice little investment is best put to use. You may have had a university education in mind but your child may see a new car or an extended vacation as a better idea.
When setting up an “in-trust” account pay special attention to the name shown on the investment account. If the investment is registered in your name and your Social Insurance Number appears on the income slip, guess who Revenue Canada expects to report the income? A simple computer cross-reference using your SIN will trigger a reassessment of your tax return to include the income Revenue Canada believes you forgot to report. Then you’re left fighting an uphill battle to convince these nice folks that the investment held in your name really isn’t yours.
There’s no age limit on holding a SIN so fill an application out on junior’s behalf. When the SIN is issued make sure that it shows up on any investment slips that are issued.
While it is best to open a bank or brokerage account in the name of the child using the child’s SIN, most financial institutions and investment firms will not do this. The next best approach is to open the account in the parent’s name “in-trust” for a named child. A less desirable approach is an account opened simply in the parent’s name with the notation “in-trust”. In either case, make sure that the child’s SIN is used and not yours.
If you’re considering setting up an “in-trust” account for your child, do it right at the very beginning. Revenue Canada challenges in this area are rare but don’t set yourself up as a test case.
Jim Maroney is a chartered accountant with Andrews Brown Maroney in Maple Ridge.
|
