In-Trust Accounts for Children in Canada: How the Tax Works

Opening an investment account for a child feels like a straightforward act of generosity — set aside some money, let it grow, hand it over when they're older. But in-trust accounts children Canada tax rules add a layer of complexity that catches many families off guard. The Canada Revenue Agency (CRA) has specific rules about who pays tax on income earned inside these accounts, and the answer depends heavily on what type of income it is.

This article walks through how informal in-trust accounts work, how the income attribution rules apply, the important capital gains exception, and how these accounts compare to RESPs and formal family trusts. As with all tax matters, the specifics depend on your situation — work with a qualified accountant for filing guidance. Where Treadstone Law adds value is on the legal structure side: making sure any trust arrangement you use is sound and enforceable.

What Is an In-Trust Account?

An in-trust account — sometimes called an informal trust or bare trust account — is a non-registered investment account that an adult (usually a parent or grandparent) opens on behalf of a minor child. The adult is listed as the account holder "in trust for" the child. The child is the beneficial owner; the adult manages the account until the child is old enough to take control.

These accounts are informal in a precise legal sense: there is typically no written trust deed. The arrangement rests on the adult's stated intention and the account's titling, rather than a formal legal document. That informality is what makes them easy to open at virtually any financial institution — but it is also their biggest weakness, which we will come back to.

In-trust accounts are separate from:

• RESPs (Registered Education Savings Plans): government-registered accounts with contribution limits, Canada Education Savings Grant (CESG) entitlements, and rules requiring funds to be used for qualifying education. RESPs have their own tax treatment.
• Formal family trusts: legal structures created by a trust deed, with named trustees and beneficiaries, formal record-keeping obligations, and their own T3 tax filing requirements every year.

How Income Attribution Works in an In-Trust Account

When an adult contributes money to an in-trust account for a minor child, the Income Tax Act (ITA) does not simply let the income follow the money. Attribution rules exist to prevent income-splitting — the practice of shifting taxable income to a family member in a lower bracket.

Interest and Dividends: Attributed Back to You

If the in-trust account earns interest or dividends, those amounts are generally attributed back to the contributing adult and taxed in the adult's hands — not the child's. This applies while the child is under 18. So if you deposit money into an in-trust account and it earns savings interest or dividend income from Canadian stocks, that income ends up on your tax return, at your marginal rate.

This significantly limits the tax-planning value of in-trust accounts for income-producing investments. You would not, for example, shelter dividend income from a high-yield portfolio by holding it in your child's name — the CRA looks through that arrangement.

Capital Gains: The Exception That Makes In-Trust Accounts Attractive

Here is where in-trust accounts become genuinely useful. Capital gains earned inside an in-trust account are not attributed back to the contributing adult. Under the ITA, the attribution rules that apply to interest and dividends do not extend to capital gains arising from property transferred to a minor.

This means that if the in-trust account holds investments that grow in value — equities, ETFs, or similar assets — any capital gains realized when those investments are sold are taxed in the child's hands, not the adult's. Because the child typically has little or no other income, their effective rate on those capital gains may be very low or even zero.

This capital gains exception is the primary reason advisors recommend growth-oriented, non-dividend-paying investments inside in-trust accounts. The strategy: minimize interest and dividends (which come back to the adult anyway) and let value accumulate through price appreciation instead.

Note: capital gains inclusion rates and child tax situations change over time. Confirm the current rules with your accountant before making investment decisions.

Common Misconceptions About In-Trust Accounts

Myth 1: "The money is in the child's name, so all the income is theirs." Wrong. The contributing adult remains liable for tax on interest and dividends regardless of whose name appears on the account. Attribution rules do not care about the account title — they follow the source of funds.

Myth 2: "An in-trust account is the same as an RESP." Not at all. An RESP is a federally registered plan with contribution limits, a government grant component, and restrictions on how funds are used (qualifying education expenses). An in-trust account is entirely non-registered, has no contribution limits, attracts no government grants, and can be spent on anything — not just education — when the child takes control. These are very different tools for different purposes.

Myth 3: "Once I put money into an in-trust account, I can take it back if I need it." This is legally uncertain and potentially problematic. If the account genuinely holds funds in trust for the child, those funds arguably belong to the child. Withdrawing them for your own use could be a breach of trust. Because these arrangements are informal and undocumented, the boundaries are murky — but that murkiness cuts both ways and can create disputes.

Myth 4: "In-trust accounts are a formal legal structure I can rely on in court." No. Without a trust deed, enforcing the arrangement — or defending it from competing claims — is difficult. Courts have varied in how they treat informal bare trusts, and outcomes depend heavily on evidence of intent.

The Bare Trust Reporting Rules: A Heads-Up

In recent years, the CRA has moved to require bare trusts — including informal in-trust arrangements — to file a T3 trust return annually. This was a significant change that caught many families and their advisors off guard, since informal in-trust accounts had historically flown under the radar for reporting purposes.

The rules in this area are actively evolving. The CRA has announced, adjusted, and in some cases temporarily suspended these requirements as implementation details have been worked out. Do not assume your in-trust account does or does not require a T3 filing without confirming the current position with a qualified accountant. Getting this wrong can result in penalties.

When the Child Turns 18

Attribution rules for minor children stop when the child reaches age 18. After that point, any income — including interest and dividends — earned inside the account is taxed in the child's hands, not the contributing adult's. This is a meaningful shift: a young adult with modest income may pay little or no tax on investment income earned in an in-trust account.

Practically, the child also gains legal entitlement to the account funds at majority (or at whatever age Ontario law treats them as having capacity to deal with the property). Because there is no trust deed specifying terms, there is typically no mechanism to delay access — the money is theirs to do with as they wish.

RESP vs. In-Trust Account: Choosing the Right Tool

These two vehicles serve overlapping but distinct purposes:

For most families, maxing out RESP room first makes sense — the government grants are essentially free money. An in-trust account works well as a supplement once RESP room is used up, especially if the investment strategy focuses on growth assets to take advantage of the capital gains exception.

When a Formal Family Trust Makes More Sense

If you are managing significant assets, have multiple beneficiaries, want to control when and how distributions are made, or need a legally enforceable structure, a formal family trust is worth serious consideration. A properly drafted trust deed:

• Clearly identifies trustees and beneficiaries
• Sets the terms under which distributions can be made (age, purpose, trustee discretion)
• Creates a legal record that can be enforced or defended
• May offer additional income-splitting opportunities depending on circumstances

Formal trusts are more expensive to set up and carry annual filing obligations (T3 returns every year, without exception), but they provide legal certainty that an informal in-trust account simply cannot.

Treadstone Law can help you structure a family trust properly under Ontario law — the legal architecture that makes sure your intentions are actually binding.