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In-Trust Accounts
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An informal trust is another way to save for your child's education and can be used to complement an RESP. In-trust accounts can be put into a variety of investments, including GICs and mutual funds.
The account is set up in the name of a trustee in trust for the child (the beneficiary). The trustee manages the investments in the account and acts on behalf of the beneficiary until the beneficiary reaches the age of majority. The trustee may not be the same person as the contributor. The assets belong beneficially to the child and must generally be held for the child until the age of majority. Different from an RESPIn-trust accounts have the following features: - No restrictions on how much can be invested.
- No penalty should the child not pursue post-secondary studies.
- Funds automatically become child's property at age of majority.
- Can be used for any purpose beneficiary chooses.
Who Can Contribute?- Anyone (parents, grandparent, aunts, uncles, friends, neighbours, etc).
Tax Implications- Contributions are not tax deductible
- Income earned is not tax sheltered
- Taxation depends on the type of income generated
- Interest and dividend income is attributed back to the contributor, until the child reaches the age of majority
- Income from re-invested interest or dividends is taxed in the hands of the child, generally little or no taxes are applied
- If the contributions made are from Family Allowance or Child Tax Benefit payments, all income earned is taxed in the hands of the child
Setting up an In-Trust Account: Caution RequiredIn-trust accounts are easy to set up, but if improperly done can expose you to some significant tax liability. It's critical that the contributor and trustee be two different people otherwise the income attribution rules will not apply. Formal TrustsA formal trust is created with a legal document, known as a Deed of Trust, and assets are set aside and administered by a third party. The Deed of Trust identifies the donor (contributor), trustee, beneficiary and assets of the trust. The deed also specifies how the assets are to be administered, how long the trust is to continue and when and how its assets are to be distributed to the beneficiaries. It is usually drafted by a lawyer and can cost anywhere from $500 to $2,500 to set up, in addition to ongoing administration costs. The advantages of a formal trust are that you can ensure that income attribution rules will apply and if desired, you can specify how the assets are to be used. There is also no age limitation to consider. To find out more
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