Informal Trust Accounts How They Work

Photo of Carol Bezaire
Carol Bezaire
Vice President, Tax, Estate & Strategic Philanthropy

Informal trusts, or ITFs as they are popularly known have been in existence for a long time in Canada. This type of account can provide 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, protection of an inheritance, or as is often the case, tax savings for the contributing adult. As advisors it’s important to keep the focus on the purpose and the tax implications when your clients are setting up an ITF.

The Parties

For clarity, let’s define who the parties usually are when an ITF account is established.

Contributor – is 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 – is the individual who benefits from the assets in the account. This is usually a minor child or children related to the contributor. The beneficiary, and not the contributor or the trustee, is always the ultimate owner of the assets.

Trustee – in a formal trust, the trustee oversees all activity in the trust account and is responsible for trust tax reporting. With an ITF account, the trustee acts as the accountholder on behalf of the beneficiary until he or she reaches the age of majority.

The difference between a formal trust and ITF account

Both types of trust will have three distinct parties – the settlor/contributor, the trustee and the beneficiary. A formal trust is usually created by a legal document referred to as a deed of trust. The ITF is just that, informal, there is no deed of trust required in its creation. 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. The Will may stipulate that the child cannot access the inheritance until, for example, age 21. Often an ITF account will be used if the inheritance is less than $100,000 to $250,000. The Will then would, in most provinces, take precedence over the rules for the standard ITF account. This would not be the case in Quebec, however, where legislation requires that in all situations, the beneficiary must take ownership of the ITF assets upon reaching the age of 18.

When establishing an ITF account, it’s important that you advise the parties to complete the application properly. The trustee and beneficiary 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. Canada Revenue Agency looks for the trustee and the contributor to be different individuals, or may, under Section 75(2) of the Income Tax Act, attribute all investment income to the trustee for tax purpose, and not allow income-splitting with the beneficiary because the contributor and related beneficiary are not acting at arms’ length. Related children include children, grandchildren, nieces and nephews among others who are related to the contributor. Income under the Act includes interest, dividends and foreign dividends.

There are some exceptions. If the assets in the ITF account are provided solely from Child Tax Benefit payments, an inheritance or allowance, all income would be attributed and taxable to the beneficiary, and not the trustee.

Realized capital gains however, are attributed to the beneficiary in most cases.

Accessing the In-Trust Funds

ITF accounts may not have a trust deed, but they are still legal and valid trusts. Contributing funds into an ITF account is irrevocable to the contributor. If withdrawals are made from the account the funds must be used for the benefit of the child until he or she reaches the age of majority. There have been occasions when a contributor (typically a parent) has felt, due to changed circumstances with the beneficiary, that they no longer want to give the funds to that child, and so collapse the ITF account and take back the money. This could have serious consequences. In such cases, Canada Revenue Agency sees the control of the assets in the ITF never left the contributor, and therefore have often attributed all income including capital gains to the contributor from the inception of the ITF. This has caused back taxes and penalties to the contributor. A landmark case will illustrate how seriously the ITF is considered in Court.

Koons v Quibbell*

In this Court case, the second wife set up two ITF accounts for her late husband’s grandchildren. She had felt badly that the grandchildren were not mentioned in their grandfather’s will. The accounts were set up with each grandchild to receive the account at 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 original 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.

Death and an ITF account

If the contributor dies while the ITF account is in place, attribution ceases and all investment income earned in the account will be taxed in the beneficiary’s hands. If the trustee dies, then the executor of the trustee will look to that individual’s will to see if a replacement trustee has been named. If there is no replacement trustee named, then the account could remain in the name of the estate until the beneficiary reaches the age of majority.

If the beneficiary dies, the assets in the ITF account will be distributed under the provincial and territorial rules of intestacy (dying with no valid will in place) because minors in most jurisdictions are not 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 the facts around establishing these accounts. The use of corporate class mutual funds is an excellent opportunity to reduce the taxation to the contributor and grow the value of investments for the future of the minor beneficiary.

*(1998) 21 E.T.R. (2d) (SASK)(QB)