In-Trust-For (ITF) Accounts: The Informal Trust That Causes Formal Problems When the Family Is Cross-Border

The in-trust-for account is the most common trust in Canada and the least documented: a parent or grandparent opens an investment account styled "in trust for" a child, contributes, and invests. No deed, no trustee minutes, often no clear answer to whether a trust was really created at all. Domestically the tax rules are settled enough — attribution sends the income back to the contributor while the capital gains can be the child's, and the new trust reporting rules put many ITF accounts in T3 territory. Add one US person — a US-citizen parent contributing, a child who is a US citizen through a parent, a family that later moves to Florida — and the informal account picks up formal US questions: is it a foreign trust requiring Forms 3520 and 3520-A, or a custodial arrangement taxed directly to the child; does the kiddie tax pull the income to the parents' rate; and are the Canadian mutual funds inside it PFICs. The account that was opened in twenty minutes can need three professionals to close.

Key takeaways

• Canadian income tax: where a valid trust exists and the contributor is a parent/grandparent, interest and dividend income attributes back to the contributor while the child is a minor; capital gains generally do not attribute and are taxed to the child. A poorly constituted "trust" risks the CRA treating the account as simply the contributor's.
• Canadian reporting: an ITF account that is a genuine express trust is inside the expanded T3/Schedule 15 regime (bare-trust-style relief aside, an ITF with real trustee discretion is not bare). Many families are filing T3s for accounts they thought of as savings.
• US characterization: if the arrangement is a trust and it is Canadian-resident, it is a foreign trust for US purposes. A US-person contributor is generally its grantor-owner — Form 3520 and 3520-A annually, with severe penalty exposure for missing them. If instead it functions as a custodial account, the US-person child reports the income directly.
• Kiddie tax: a US-person child's unearned income above the annual threshold (about $2,700, indexed) is taxed at the parent's rate on Form 8615 — attribution to a Canadian parent for CRA purposes does not remove it from the child's US return.
• PFICs: Canadian mutual funds and ETFs in the account are PFICs to any US person taxed on them — Form 8621 and punitive default rules.
• Foreign tax credits misalign: Canada taxes the contributor (attribution); the US taxes the child or the grantor — different taxpayers on the same dollars, so credits often cannot be matched.

What the account actually is

The characterization question decides everything, and the evidence is whatever exists: account documents, who controlled withdrawals, whether funds were ever used for the contributor's benefit. Three certainties are true regardless: the money irrevocably belongs to the child at majority if a trust exists; the income has to be reported by someone in each country; and "we never filed anything anywhere" is not one of the available characterizations.

The clean-up options

For a cross-border family the usual endpoint is winding up: distribute to the (now adult) child or convert to a formal structure, catching up the filings the chosen characterization requires — T3s in Canada; 3520/3520-A or the child's amended returns in the US, often through a disclosure procedure if years were missed. The forward-looking alternative for education savings is deliberate: an RESP has its own US issues for US-person subscribers, and sometimes the right answer for a US-citizen parent in Canada is a plain taxable account in the child's name with US-compliant ETFs — boring, and reportable by exactly one person per country.

Worked example

A Canadian grandmother has $90,000 in an ITF account for her granddaughter, invested in Canadian equity mutual funds. The granddaughter, 16, is a US citizen (her father is American) living in Oakville. Canada: interest and dividends attribute to the grandmother while the granddaughter is a minor; realized gains are the granddaughter's; the account, run with real discretion, files a T3 with Schedule 15. US: the granddaughter is a US person and a beneficiary of a Canadian trust funded by a non-US person — distributions to her are reported on Form 3520, the mutual funds she is taxed on are PFICs (Form 8621, with a qualified-electing-fund election unavailable and mark-to-market usually unavailable for these funds), and her fund distributions above the kiddie-tax threshold are taxed at her father's US marginal rate. The family winds the account up at 18: the funds are sold (gains taxed to her in Canada at her low rate; the PFIC computation in the US does its damage once), the T3 and 3520 filings are trued up, and the proceeds move to a US-clean portfolio.

Official sources

The CRA states that "Bare trusts are not subject to the trust reporting rules and are therefore not required to file a T3 return, including Schedule 15, for taxation years ending on or after December 31, 2024 and before December 31, 2026" (and were exempted for 2023 as well); other affected trusts must file a T3 with Schedule 15 for tax years ending after December 30, 2023. The T3 late-filing penalty is "$25 a day... from a minimum of $100 to a maximum of $2,500," and the gross-negligence penalty is "the greater of $2,500 and 5% of the highest amount of the fair market value of all the property held by the trust at any time in the year." — Canada Revenue Agency, New trust reporting requirements for T3 returns, https://www.canada.ca/en/revenue-agency/services/tax/trust-administrators/t3-return/new-trust-reporting-requirements-t3-filed-tax-years-ending-december-2023.html

The IRS explains that a child's unearned income above an annual threshold may be taxed at the parent's marginal rate rather than the child's rate, computed on Form 8615, where the child is under 18 (or under 24 for certain students) and has at least one living parent. — Internal Revenue Service, Topic No. 553, Tax on a Child's Investment and Other Unearned Income (Kiddie Tax), https://www.irs.gov/taxtopics/tc553

U.S. persons file Form 3520 to report certain transactions with foreign trusts, ownership of foreign trusts under the grantor trust rules, and receipt of certain large gifts or bequests from certain foreign persons. — Internal Revenue Service, About Form 3520, https://www.irs.gov/forms-pubs/about-form-3520

Practitioner note

ITF accounts are where good intentions meet zero paperwork, and the cross-border version is the worst of it because each country characterizes the same account differently and taxes a different person. Our first question is always the same — who has actually controlled this money — because the answer decides which of three filing histories needs to be rebuilt.

See also: Browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the ITF characterization memo, the catch-up filings the answer requires in each country, and the wind-up plan that leaves the child with a reportable, US-clean portfolio. See cross-border pricing or book a call.