Qualified Disability Trust - significant tax advantages
To schedule an appointment, contact our law firm at 403-400-4092 or Chris@NeufeldLegal.com
A Qualified Disability Trust (QDT) is a specific type of trust in Canada designed to provide a significant tax advantage for a person with a disability. It's important to understand that a QDT is not the same as a Henson Trust, although a single trust can be structured to function as both. The primary purpose of a Qualified Disability Trust is tax minimization, with the core aspects including:
A. Preferential Tax Treatment
-
This is the main benefit of a Qualified Disability Trust. Unlike most trusts, which are taxed at the highest marginal tax rate (currently over 50% in some provinces), a QDT is taxed at graduated personal tax rates. This means the first dollar of income is taxed at the lowest rate, and the tax rate increases as the income level rises, just like for an individual. This can lead to significant tax savings over the lifetime of the trust.
B. Testamentary Trust
-
A QDT must be a testamentary trust, meaning it is created in a will and comes into existence upon the death of the person who created it. It cannot be an inter vivos trust (one created during a person's lifetime).
C. Disability Tax Credit (DTC) Eligibility
-
For a trust to be designated as a QDT, at least one of its beneficiaries must be eligible for the federal Disability Tax Credit (DTC). The beneficiary must also be specifically named in the will that created the trust [more on Disability Tax Credit].
D. Joint Election
-
The trustee of the trust and the qualifying beneficiary must make a joint election with the Canada Revenue Agency (CRA) on the trust's tax return (Form T3QDT) to designate it as a QDT. This election must be made annually. If the beneficiary lacks the mental capacity to make the election, their legal guardian or representative can do so on their behalf.
E. One QDT Per Beneficiary
-
A qualifying beneficiary can only have one trust designated as a QDT in a given tax year. If multiple trusts are created for the same beneficiary (e.g., in the wills of both parents), the family must choose which one will be a QDT and which will be taxed at the highest marginal rate.
F. Recovery Tax
-
The QDT status can be lost if certain conditions are not met, which could trigger a "recovery tax." This is a clawback of the tax savings. The recovery tax is typically applied if: The trust makes a distribution to a beneficiary who is not a qualifying beneficiary. The trust ceases to be a resident of Canada.
Qualified Disability Trust vs. Henson Trust
It's crucial to distinguish between a Qualified Disability Trust and a Henson Trust, as they serve different primary purposes:
-
Henson Trust: The main goal is to protect the disabled individual's eligibility for government benefits (such as Alberta's Assured Income for the Severely Handicapped (AISH)) by ensuring the trust assets are not considered their personal property [more on AISH]. It does this by giving the trustee complete and absolute discretion over when and how funds are distributed.
-
Qualified Disability Trust: The main goal is to gain a tax advantage by allowing the trust to be taxed at graduated personal rates. This can be a key part of a comprehensive estate plan, especially for larger inheritances.
A trust can be structured to be both a Henson Trust and a QDT. This is often the ideal approach, as it provides both the benefit of protecting government benefits and the tax advantages of the graduated tax rates.
AA Qualified Disability Trust is a powerful tax-planning tool for families with a disabled loved one who qualifies for the Disability Tax Credit. By allowing the trust's income to be taxed at graduated personal rates, it can significantly reduce the overall tax burden and preserve more of the inheritance for the beneficiary's long-term care and well-being.
We welcome you to shedule an appointment with lawyer Christopher Neufeld, such that your estate planning objectives, including the legal and technical demands of your special needs child, are properly accounted for when structuring your inheritance to best protect your children in your absence. Contact our law firm today at 403-400-4092 or via email at Chris@NeufeldLegal.com to schedule a confidential initial consultation.
IMPORTANT NOTE: This website is designed for general informational purposes. The site is not designed to answer specific questions about your individual situation or entitlement. Do not rely upon the information provided on this website as legal advice in respect of your individual situation nor use it as substitute for individual legal advice. If you want specific legal advice, you need to engage a lawyer under established legal engagement procedures that have been specifically agreed to by that lawyer.
Contact Info - Mobile Services - Hospital Visits - Legal Notices - Privacy - Terms of Use - Main Will Webpage