Setting Up a Trust Fund for a Child in Canada (5 Key Points)
For many Canadian families, setting up a trust fund for a child is an act of love, foresight, and financial responsibility. It’s not just for the ultra-wealthy or the elite—it’s a practical tool for parents, grandparents, or guardians who want to ensure that a child has financial support for key life events, such as post-secondary education, buying a first home, starting a business, or receiving an inheritance in a structured way.
A trust fund can protect assets from being squandered too early, provide ongoing financial stability, and potentially offer tax planning benefits. In some cases, it’s also used to safeguard assets from creditors, divorce settlements, or mismanagement, especially if the child has special needs or lacks financial maturity.
In Canada, however, the process of setting up a trust for a child involves navigating evolving tax rules, legal nuances, and personal goals. Whether you're thinking about an informal in-trust-for (ITF) account or a formal trust agreement with professional trustees, understanding the mechanics is crucial.
Below are five key points every Canadian should know when setting up a trust fund for a child.
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1. Clarify the Purpose of the Trust
Before diving into legal structures and financial setups, it's essential to define why you're creating the trust. This decision will inform every other step in the process. Common purposes include:
Education savings: Supplementing or going beyond RESPs to cover tuition, books, or living expenses.
Long-term financial support: Ensuring financial independence into adulthood.
Special needs planning: Providing lifelong care for a disabled child while preserving eligibility for government benefits.
Inheritance planning: Passing on wealth in a controlled and strategic manner, especially after death.
Asset protection: Preventing future creditors or divorcing spouses from claiming the child’s inheritance.
Knowing the purpose will help you determine which type of trust best suits your needs—and how much control the trustee should have over the distribution of funds.
2. Choose the Right Type of Trust
There are several types of trusts in Canada, each with its own rules and ideal use cases.
a) Informal In-Trust-For (ITF) Accounts
These are the simplest to set up—usually at a bank or financial institution—and often used by parents or grandparents. While convenient, they come with major limitations:
The child gains full access to the funds at the age of majority (18 or 19).
They offer minimal legal control once the child becomes an adult.
Tax attribution rules apply (see next point).
b) Formal Trusts (Inter Vivos or Testamentary)
These are legal arrangements drafted by a lawyer. You can customize them to:
Control when and how the child receives the funds.
Appoint trustees who will manage the assets with discretion.
Establish conditions for use (e.g., for education, home purchase, or business only).
A testamentary trust (created through a will) comes into effect upon your death. An inter vivos trust is established while you’re still alive.
c) Henson Trusts
For children with disabilities, a Henson trust allows you to provide support without affecting their eligibility for provincial disability benefits. The trustee has full discretion, and the beneficiary has no enforceable right to the funds—this distinction is key in maintaining benefit eligibility.
3. Understand How Trusts Are Taxed
Trusts aren’t a tax-free loophole. In fact, the CRA has tightened rules in recent years to reduce tax avoidance, especially where minor children are involved.
Attribution Rules:
If a parent contributes money to a trust for a child under 18, any income (interest or dividends) is taxed in the parent’s hands.
However, capital gains may be taxed in the child’s hands, potentially at a lower rate—this is one of the few remaining planning opportunities.
Kiddie Tax:
Passive income earned by minors through certain trusts may be subject to the highest marginal tax rate, negating any tax advantage.
Tax Filings:
Trusts must file a T3 return annually, reporting income and distributions.
As of 2023, bare trusts and even ITF accounts may be subject to new reporting rules (more on that below).
Tax law around trusts is complex, so it’s critical to speak with an accountant or tax lawyer to ensure compliance and optimize the setup.
4. Control When and How the Child Gets the Money
One of the biggest mistakes people make is unintentionally giving a child full access to a large sum of money at 18 or 19. While some teenagers are financially savvy, many are not prepared to responsibly manage a windfall.
Discretionary Trusts:
Formal trusts allow you to structure distributions:
At specific ages (e.g., 25, 30, 35)
When certain milestones are reached (graduation, marriage, etc.)
At the trustee’s discretion, based on maturity or need
The ability to stagger payments or restrict access is one of the greatest advantages of a properly drafted trust. It protects the child from themselves, from outside influence, and from life’s unpredictability.
5. Comply with New Trust Reporting Rules (2023 and Beyond)
As of the 2023 tax year, the Canada Revenue Agency (CRA) now requires significantly more information about most trusts—even informal or inactive ones.
New Requirements:
More trusts must now file T3 returns, even if they didn’t earn income.
Trustees must report names, addresses, birthdates, and tax IDs of all settlors, trustees, beneficiaries, and protectors.
Penalties for failing to file or providing incorrect information can be steep—up to $2,500 per year, plus additional amounts for gross negligence.
These changes are meant to increase transparency and reduce hidden wealth or undeclared income. As a result, many in-trust-for (ITF) accounts are now under CRA scrutiny, and it's no longer safe to assume that an informal setup is “off the radar.”
Final Thoughts
Setting up a trust fund for a child in Canada can be one of the most meaningful financial decisions you make. It offers the potential to provide long-term security, support education, teach financial literacy, and protect a young person from financial missteps.
But it’s not something to rush into or handle casually. Tax rules are complex. Legal structures matter. And the goals behind the trust should guide every decision.
Whether you're leaving a legacy, funding future dreams, or protecting a child with special needs, a well-crafted trust is a powerful tool—but only when it’s done right. Consult with a lawyer and a financial advisor to ensure that your trust reflects your values, your goals, and the realities of Canadian law.
