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October 14, 2019 | Kid Cash

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Enough of T2, Jag, ‘Doug’ Scheer, Max, Greenies-Greta and the Blochead dude. Let’s stray back into the real world for at least a day, where people actually mean what they say. In this life folks worry about taxes, cash flow, houses, debt, savings, pensions and their kids. And that brings us to Kate and her Little Star.

First, the MSU: “I am a long-time reader, shook your hand once, has been featured on the blog before and keep sending you every cute picture of a dog I see on the Internet. In short, many years faithful fan here. Here goes the mandatory introduction paragraph. But this is not what my email is about.”

Of course not. There’s an ask coming. Turns out Little Star is 11 and has been bringing home money as a movie/commercial extra. Mom, apparently, is also weird. “We are reading the books about stock market investing before bed and once she understands diversification, indexes, compound interest and freedoom-35 concepts, I want to lure her into putting 50% (or more) of her income into a portfolio. Now the question is where her portfolio should be kept.”

There’d be no issue if LS was at the age of majority (19 in BC, 18 most everywhere else) since then she could have a TFSA and chunk the cash in there routinely, or just open a non-reg account. But minors can’t do that. And parents wanting to teach their kids about investing face an issue.

Here are the four options Kate is sweating, and her comments:

1. Formal trust – expensive to set up (requires a lawyer), can put any money in (not sure if they care about the source), cannot withdraw anything until she is 19 and then the interest/capital gains are taxed in her hands (?). It seems too complicated and not too flexible.
2. Informal trust – easy to set up but NGATB told me that the money invested will be attributed to me (why? she is the one who earned the money). The Internet says that parents receive letters from CRA but as long as they can prove (yearly?) that the income belongs to the child (invoices, CCB statements), they are fine. The Internet also says that people do withdraw the money but then it is a gray area since the trust is informal. This seems an OK option as long as I can prove that she made the money and the investment income is attributed to her.
3. RESP – ours is unfortunately maxed 😉
4. My TFSA – I have a little bit of room there. I can create a separate TFSA for her under my name and make her a beneficiary and once she is 19, move all the money into her accounts tax-free. BUT if I die before that, she will be taxed on interest/capital gains. Besides, she is eating up my TFSA room and what if she starts making a reasonable amount?

“What would you recommend? I do not think you previously discussed this topic in your blog and it might be helpful for other people, too. It looks like my idea to train her to save and invest from the early age is not easy to implement. I would really appreciate your opinion on the subject.”

Good research. A formal trust is a truly bad idea, costly, cumbersome and irrational unless Little Star is bring in tens or hundreds of thousands. An informal trust, or in-trust account, is just that – not a trust, just a bank vehicle with a defined beneficiary. No cost involved, but there are things to know…

Once money is in there, it belongs to the kid on a permanent basis. Income – interest and dividends – is attributed back to the trustee (mom) for tax purposes. But since most assets for an 11-year-old would be growthy in nature, yielding capital gains, no tax. In any case, if you want to prove to the CRA that LS earned the money, fine. You can also throw in the monthly kiddie pogey too, and no income will be attributed to you. Once the child hits the age of majority, the trust becomes their property, with all gains/income taxable in their hands. If the trustee croaks before that happens, the in-trust account sits in the estate until the offspring hits 19/18.

So, this is an option. But be aware a trustee has obligations to manage the money prudently. If not, the kid can sue you. Seriously.

Well, here’s the advice.

The first choice is the RESP, since money grows in 100% tax-free and LS is already the beneficiary. A nice balanced portfolio can be held there, and lots of lessons taught and learned about how assets perform. You say the current RESP is ‘maxed’? That probably means you’ve put enough in annually to earn the full government grant ($2,500). But the rules allow $50,000 to be dumped into this type of account, per child, and invested for decades. So there is likely enough room here to store lots of royalty cheques. Plus you can still go back one year at a time and claim the grant.

Second choice is to use your TFSA, and simply decide that the proceeds will go to your child when she hits the magic number. All growth is free of tax and, no, nothing will be taxed away if you die – only the increase in the value of the TFSA (if any) following death. If you have a spouse, make him the ‘successor holder’, then he can gift the money later. Also tax free.

Lastly, third choice, is that in-trust account. There’s the potential for confusion here, a CRA challenge, tax attribution or legal issues. The good news is then you can teach her the difference between torts and tarts. Essential in show biz.

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October 14th, 2019

Posted In: The Greater Fool

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