Informal Trust accounts

[ah123]

I didn't want to hijack the RESP thread with this, although there is some overlap.

We are considering setting up an informal trust account for our daughter - this is on top of her RESPs.

What I don't understand are the tax implications of such an account - we would be buying mutual funds in this account, but who pays the tax on any dividends/capital gains?

Anyone have experience with this type of account?

[MoneyGuy]

These informal trust accounts are potentially dangerous. Legally, IT money belongs to the child and must be turned over to that person's control at age 18. This is very different than with an RESP, where the money belongs to the contributor.

Very few people follow the rules faithfully. If it's set up correctly, income is to be declared by the child, who is not in a tax-paying situation anyway unless there is income over the basic personal exemption amount ($10,320). I believe that one day we will see lawsuits because parents have withheld IT money from the child past age 18, but that's a minor issue in almost all cases.

So, to answer the question, set this up correctly with the right intentions and you can pass these taxes along to a non-taxable child. If, at the child's age 18, you don't turn this money over to the child, CRA could make you pay the taxes throughout the life of the IT account.