Q – We have a bank account for each of our grandkids to which we add money each year on their birthdays.
When they turn 18, we want to add them to our account, which is now joint with my husband and myself. If they withdraw money, do they have to pay the taxes? Or are my husband and myself responsible for that? – Kathie S.
A – Be very careful. This arrangement could turn into a major problem. You appear to be planning to add the grandchildren to the joint bank account held by you and your husband. That could have the effect of making it a “bare trust,” a financial structure that has become a target of the Canada Revenue Agency.
Verus Financial, a division of National Bank Financial, says the following.
A bare trust exists when:
- One person is added to an account or asset for legal title only.
- The original owner retains full control over the account or asset.
- The joint owner has no beneficial interest until the original owner passes.
This is often seen when parents add children to an account for convenience, but legally the CRA may view it differently.
Verus gives this example:
Ben was added as a joint owner on his 82-year-old mother’s non-registered investment account to help with her financial affairs. She maintained full control of the account, made all investment decisions, and continued to file taxes on the income. Ben believed this was a routine joint account, but in reality, he held legal title without beneficial interest.
This is a clear example of a bare trust.
Under the CRA’s updated guidance, this arrangement likely meets the criteria for mandatory reporting. If left unreported, penalties can reach $25 per day, up to a maximum of $2,500, even if the account generated no income. So, as you can see, the problem is not taxes – you can gift as much money as you wish to adult children or grandchildren. But if you proceed in the way you’ve suggested, you may end up having to file a T3 Trust return. I suggest you talk to a tax accountant before proceeding. – G.P.