The article “The Bank Of Grandma And Grandpa” was originally published on MoneySense on June 12, 2019.

Sol wants to contribute to his grandkids’ future with annual gifts he’ll start now. What’s the best way to manage the money outside of RESPs?

Q. I’d like to start gifting $3,000 a year to each of my two grandchildren, who are now three and four years old. Their parents already contribute $2,500 every year to their RESP so there is no advantage adding to that.

Instead of having a joint informal trust investment (JITI) account with each of my grandchildren, I prefer that their mother or father become each child’s trustee. But I’m wondering: When the assets in each JITI generate interest and dividends, would that be attributed to the parent or the child?
– Sol

A. Unlike in the United States, there is no gift tax in Canada, so the act of gifting money to a child or grandchild on its own does not create a taxable event. It’s what happens with the money afterwardthat matters.

If a parent or grandparent contributes to a Registered Education Savings Plan (RESP), there are no subsequent tax implications for the parents or grandparents to worry about. Growth is tax-deferred, and any tax on future withdrawals is taxable to the child or grandchildren (assuming they attend eligible post-secondary education), and in most cases, they’re required to pay very little or no tax on those withdrawals.

Up to $2,500 per year of RESP contributions per beneficiary is eligible for the Canada Education Savings Grant (CESG), a matching contribution by the federal government which tops up the contribution by 20%.

Keep in mind, Sol, that it’s possible to contribute more than $2,500 per year to an RESP account—so you could top up what the parents are already contributing for your grandkids. However, it sounds as though you’ve already concluded only benefit to your doing so is that the additional funds will grow tax-deferred (there is no matching government grant for annual contributions above $2,500). It’s equally important to remember there is a lifetime maximum RESP contribution limit of $50,000 per beneficiary; plus, if you make contributions that exceed the $2,500 annual maximum for the CESG top-up, you might limit your grandchildren from qualifying for the CESG in future years.

The lifetime limit for CESG top-ups is $7,200 per child, and to qualify for that $7,200, you’d need to contribute $36,000 in total ($36,000 times 20% is $7,200). That means, Sol, you may be able to contribute an incremental $14,000 to your grandkids’ RESP accounts over the years, making this a potential option for your stated $3,000 annual gift plan. You could contribute $3,000 per year for four years, plus a further $2,000 for one year without limiting your grandkids’ ability to get the maximum CESG top-up.

Another consideration is whether your adult children are maximizing their Registered Retirement Savings Plans (RRSPs)* or Tax-Free Savings Accounts (TFSAs)*. If they are not, Sol, they might consider leaving the grandkids’ future RESP contributions to you, while they focus on their own retirement savings. You could give them the money to contribute to the existing RESPs, or open RESPs of your own for the grandkids.

If you really want to open a non-registered, taxable investment account, an informal trust account with or for your grandchildren is one option, as you’ve noted. I can’t say I have ever seen a joint account between a parent and a minor child, or a grandparent and a minor child. I have bank accounts for my own minor children, in fact, but they are in the children’s names. And when I have seen investment accounts for minor children, they have been informal trust accounts, solely in the child’s name.

I can only assume this has something to do with the inability for a minor to enter into a contract; or perhaps it’s standard practice within the financial industry due to what’s called presumption of advancement. What that means is, absent evidence to the contrary, a joint account with a minor child is assumed to be intended for that minor child anyway. Interestingly, a joint account with an adult child, absent evidence to the contrary, is the other way around—presumed to be held in trust for the parent by the child.

One problem with opening an informal trust account for or with a minor child is that the account becomes theirs at the age of majority, with no restrictions. There is also the risk of what happens to the account if you die. If a trust account is going to be large enough—and how much is “enough” depends on whom you ask—a formal trust account may be preferable. A formal trust established with a lawyer can set guidelines and have a trustee to oversee the account beyond the child’s age of majority or after your death. There are, however, costs to establish and maintain a formal trust account that won’t apply to an informal trust such as you are suggesting.

If you open an informal trust account for your grandchildren, Sol, you should note that the income (interest and dividends) is attributed back to you. This means that income should be reported on your tax return, with tax payable by you. Capital gains, however, are not subject to attribution. This means capital gains can be reported on the minor’s tax return, with tax payable by them. If a child has no other income, they would need capital gains of more than $20,000 in a given year in most provinces to even be subject to tax payable. So, if you invest in an informal trust account primarily for capital appreciation, you may be able to minimize taxation.

The same attribution rules—income attributed to the adult, but capital gains attributed to the child—applies if the parents open an informal trust account for your grandchildren.

A properly established formal trust may allow you to have income and capital gains taxable to your grandchildren. But again, the costs and complexity associated with formal trust probably make them more suitable for large accounts.

Some other alternatives for helping your grandkids, beyond RESP contributions and trust accounts, include things like buying them a life insurance or critical illness insurance policy that they can take over when they are adults.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.