Understanding informal trust accounts

06 October 2022 by National Bank
Couple in a meeting with their financial advisor

Is an informal trust account something you could use? To find out, let’s start by learning what it is to avoid any confusion. Informal trust accounts and formal trusts are not the same thing, even if their names are similar. An informal trust account may or may not be the account best suited to your needs. Here’s what you need to know to determine whether an informal trust account is right for you.

What is an informal trust account used for?

An informal trust account is often a temporary account used to set aside money for someone else.

Example: A parent wishes to help their child buy a first home once they’ve grown up. The parent therefore opens an informal trust account to fulfil this objective. 

It isn’t always necessary to create a formal trust to meet your objectives, but informal trust accounts shouldn’t always be the go-to choice, either. This is why it’s best to meet with a specialist who can guide you.

Why are informal trust accounts often misunderstood?

Informal trust accounts are sometimes confused with other similar accounts. 

There are several ways to deposit, save, or manage funds for another person. Each of these methods has its own features and specific name.  

In addition to informal trusts, there are: 

  • Accounts in the name of an ex officio administrator (e.g., accounts held by ex officio guardians)
  • Formal trusts
  • Trust accounts (also called in-trust accounts)

Are there differences with trusts in the various provinces and territories?

Yes. You can use the same form to open an account in two different provinces and have the same intentions, but not end up with the same account.

Good to know: Financial institutions can change their administrative practices regarding informal trusts, and some have even decided to no longer offer this type of account.

What are the primary differences between informal and formal trusts?

They differ:

  • In their primary objective
  • In the eyes of the law
  • In how they are structured
  • In how they are created

Legally speaking, an informal trust account is not an actual trust. 

An informal trust account typically means an account managed by one person, for the benefit of another.  A formal trust account, in contrast, typically relates to a formal trust agreement and may have more than one beneficiary, broader powers and requires a formal trust deed.

Are trusts different under common law and the Civil Code of Quebec?

Yes, in the common law provinces, trusts are different than they are in Quebec, where the Civil Code of Quebec applies.

Common law provinces

The creation of a trust in a common law province is considered less formal than it is in Quebec. It is created if the conditions (certainties) and intentions are complied with. There must be three identifiable certainties:

  • Intention: There must be certainty of the intention to create a trust
  • Property: There must be certainty as to what property makes up the trust
  • Beneficiary: There must be certainty as to who the beneficiary is

Quebec (Civil Code) 

Under the Civil Code of Quebec, there are precise guidelines for creating a formal trust. It's usually created under the terms of a deed of trust and must comply with mandatory conditions.

As a rule, it’s either an inter vivos trust or a testamentary trust.  

Choosing between an informal trust account or another type of account 

Work with professionals at your financial institution to choose the best account for your needs. You can ask them any questions you may have and analyze the options available to you.

Different factors will influence the type of account you decide to open. Ask yourself these questions to determine the right account for you:

  • Where will the money come from? Child Tax Benefit payments, an inheritance, salary, allowance, or gift for the child, etc.
  • Why are you opening the account? 
  • What are the terms and conditions set out in the application for opening the account that you’ve chosen?

What you need to know about informal trusts from an income tax perspective

You may want to use an informal trust account to pay less tax because the potential beneficiary’s income is lower than your own.  

Many factors will need to be analyzed, however, to determine who should be taxed on the income and gains generated by the account.

In particular, consider:

  • Official ownership of the funds: Does the money in the account officially belong to the beneficiary or to the person who deposited it to the account? 
  • Source of the funds: child benefit, family allowance, gift, etc. 
  • Possible application of attribution rules: This could mean that the person who originally deposited the funds may be taxed 

Good to know to make your life simpler 

Regardless of the province or territory you live in, always:

  • Make sure you define your intentions and needs
  • Read the documents related to opening the account and keep them in a safe place 
  • Act in accordance with your original intentions

This way, you will avoid confusion about the account’s features and any potential problems.

Since your situation is uniquely your own, there’s no one-size-fits-all solution for managing your wealth. Talk to our specialists to find out if an informal trust account is right for you. Together, you can avoid any unpleasant surprises and determine whether it’s the account best suited to your needs. We're here to answer your questions.

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