Supporting a loved one with a disability is a challenging responsibility with many considerations. Ensuring their needs are taken care of requires proper care and attention. The qualified disability trust (QDT) may be an option to provide your loved one with adequate financial support.
The QDT is a type of testamentary trust that has been available since 2016. The primary benefit of this trust is that the income retained by the trust is subject to tax at graduated rates. The QDT was created in response to significant changes to the taxation of testamentary trusts that were implemented in 2016. Prior to that time, all testamentary trusts were eligible for graduated tax rates. Beginning in 2016, most testamentary trusts are subject to tax at the highest marginal rate. The QDT was created to ensure that trusts created for the benefit of a disabled individual could continue to benefit from graduated rates.
To qualify as a Qualified Disability Trust, the trust must meet the following criteria:
The trust must be a testamentary trust that arose on the death of an individual.
The trust must be resident in Canada.
The trust must make a joint election with the qualifying beneficiary.
Electing beneficiaries must be named beneficiaries, meaning they must have been named a beneficiary in the Will or other instrument that created the trust.
Each electing beneficiary must qualify for the disability tax credit.
Each electing beneficiary can only make one QDT election for each year.
The QDT election must be submitted with the trust tax return each year. The election must include the name and social insurance number of the electing beneficiary, and it must be signed by the trustee and the electing beneficiary or their guardian. Late-filed elections will not be accepted, and the trust will be subject to tax at the highest marginal rate.
This election can be highly beneficial as it is not always advisable to distribute the income from the trust to the beneficiary. Many social assistance benefits such as provincial disability benefits are income and asset tested. Distributing income from a trust to the individual could cause them to exceed the income and asset limits and therefore jeopardize their benefits. The QDT ensures that the income is taxed at the same graduated rates as an individual while simultaneously preserving access to these benefits.
A recovery tax could apply in the following situations:
At the end of the year, none of the beneficiaries of the trust was an electing beneficiary for a preceding year.
The trust ceases to be a resident of Canada.
A capital distribution is made to a non-electing beneficiary.
This recovery tax is in place to ensure that individuals other than the electing beneficiary do not receive the benefits of the graduated tax rates. The calculation of the recovery tax is complex, but it in effect it equals the amount of tax that would have been assessed if the trust was subject to tax at the highest marginal rate in previous years excluding any amounts that were distributed to the electing beneficiary.
There are additional options that may be available to help you and your loved one, such as the Registered Disability Savings Plan, Preferred Beneficiary Election, and Henson Trust. Each of these options have benefits depending on your specific needs.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA