Estate planning can be an overwhelming process. With so many options and so much information available, it can be difficult to know where to start.
Popular estate and tax planning tools, such as joint bank accounts, are often used in order to avoid the probate process and provide for children and grandchildren. In-trust accounts are also used as a means to provide for children or grandchildren. These accounts allow the holder to make decisions on behalf of a minor, split income and permit a type of inheritance to a minor, since minors are unable to accept gifts under a will.
Although both joint bank accounts and in-trust accounts seem like effective ways to provide for loved ones, these accounts each come with risks and a degree of uncertainty that must be understood before relying on them for planning purposes.
In-trust accounts
In-trust accounts are generally used to set aside money for someone else. An in-trust account consists of a contributor, who deposits money into the account, a beneficiary, who benefits from the account, and a trustee, who decides what to do with the funds in the account in the interests of the beneficiary.
Often, the contributor and trustee are the same person, and they are likely a parent or grandparent setting up the account for the benefit of their child or grandchild. An account like this resembles and functions like a trust, but without the formal documentation.
In-trust accounts can present a lot of uncertainties and risks. A legal trust requires a certainty of intention, certainty of subject-matter and certainty of object. This means that it must be clear (i) that a trust relationship was intended, (ii) who is to benefit from the trust, and (iii) what property forms part of the trust. Since an in-trust account lacks formal documentation setting out these requirements, problems may arise.
For example, the Canada Revenue Agency (CRA) may not see an in-trust account as a trust, resulting in the contributor owing taxes on any income earned in the account.
Things can get complicated when the trustee or a beneficiary that is a minor passes away. For example, if not specified by the contributor, it may be unclear as to who is supposed to act as trustee when the trustee dies. If the trustee has not named anyone in their will to replace them, the executor of their estate, who may not share the same intentions as the trustee, will take on this role. If the minor beneficiary dies first, the law of intestacy will decide what happens with the funds since minors cannot have a will. This could, again, go against the intentions of the contributor with respect to the in-trust funds.
New tax reporting requirements for trusts
The CRA has introduced new tax reporting rules for trusts for taxation years ending after December 30, 2023, which may impose additional reporting obligations for in-trust accounts. The changes require that all trusts, unless specific conditions are met, must file a T3 return on an annual basis. In addition, most trusts that are required to file a T3 return annually would also need to complete Schedule 15 in the T3 return to report beneficial ownership information.
Under the new rules, most express trusts resident in Canada must file the T3 return annually. An express trust is a trust created with the settlor's express intent, unlike a resulting trust or constructive trust. For all other trusts, the T3 return does not need to be filed every year. However, filing is required in situations such as when the trust has tax payable, is requested to file, has a taxable capital gain or holds certain property.
The above new reporting rules equally apply to bare trusts. Under a bare trust, the trustee has no significant power or discretion over the management of the trust and holds the trust property for registration purposes only. It was recognized by the CRA that the new reporting requirements for bare trusts have had an unintended impact. As a result, the new T3 and Schedule 15 filing requirements for the 2023 tax year have been waived for bare trusts, unless the CRA makes a direct request for these filings. For future tax years, the CRA will work with the Department of Finance to further clarify its guidance on the filing requirements for bare trusts.
Joint bank accounts
A joint bank account is an account held jointly by two or more people. This type of account can be opened by two or more people jointly, or a person can add someone as an owner on an already existing account. In the latter case, they are effectively transferring property of the account to be held jointly.
Joint bank accounts are commonly used between spouses or between an elderly parent and an adult child. Elderly parents will often add their adult child to their bank account to help them with account management, such as paying their bills, and also to avoid probate fees.
With a joint bank account comes the right of survivorship. This means that when one of the account owners passes away, the surviving owner will take full ownership of the account. In theory, the bank account will not form part of the deceased's estate since the surviving owner has full legal title to the account through the right of survivorship. However, in practice, this result is not always the intention of parent and child joint account owners. As such, the Courts have developed a presumption of resulting trust to address this situation.
Presumption of resulting trust
For accounts between a parent and child, the presumption of a resulting trust generally applies to the surviving owner. This means that the Court will assume that the survivor, generally the child, is to hold the money in the account in trust for the estate of the deceased, generally the parent. This resulting trust is often the subject of estate litigation which can be a lengthy and costly process.
The Court will only assume a gift was intended for the surviving owner if they are a minor. The surviving adult child may attempt to rebut this presumption of resulting trust and prove to the Court that a gift of the joint account to them was intended, but it will not be easy and will likely result in substantial legal fees.
The Supreme Court of Canada discussed and defined these principles in Pecore v Pecore, where a daughter was transferred money to be held jointly in her father's account. The presumption of resulting trust applied. The daughter then had to go through the process of trying to prove that her father's intentions for the joint account were to give her a gift in the form of the right of survivorship and sole ownership of the account following his death. She relied on the fact that on multiple occasions he stated that he wanted to take care of her after he passed away.
This can be very difficult to do, especially when a parent has multiple children. For example, if in a will a parent states they want their money to be divided equally among their three children and one of them has a joint account with the parent, it will be difficult for them to prove that a gift was intended. The money will likely end up forming part of the estate and will be divided between the three children.
In order to prove a gift was intended, an adult child may point to the intentions behind opening the account. This, however, can also be hard to do if there is no documentation of the intentions at the time the transfer took place. Paperwork from the bank may be helpful, but it is certainly not guaranteed to prove anything. A person might also look at who had control over the funds of the account, what the money was used for, who benefitted from the account, who paid the taxes on the account and whether or not there was a Power of Attorney.
It is important to keep in mind that, while an adult child will use these factors to prove a gift was intended, the other adult children will be using the same factors to prove that the money is supposed to form part of their parent's estate.
It may be best to avoid these accounts all together in order to avoid any litigation and disputes arising from the presumption of a resulting trust.
Navigating the decision of whether to incorporate in-trust accounts and joint accounts into your personal estate and tax planning objectives should be determined on a case-by-case basis, taking into account various factors specific to your situation.
Summer Student-at-Law Tobey Xiang assisted in updating this article.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.