Understanding Trusts in Ontario

A trust is a legal arrangement where one person (the Settlor) transfers assets to another person or institution (the Trustee) to manage for the benefit of someone else (the Beneficiary). While a trust isn’t considered a separate legal entity, it is treated as a taxpayer by the Canada Revenue Agency (CRA) and must file an annual income tax return.

There are two main types of trusts used in Ontario:​

Inter-Vivos Trust

Created during the settlor’s lifetime. While it can be useful in certain situations, it’s often less effective for disability planning because income is taxed at the highest marginal tax rate.

Testamentary Trust

Comes into effect after the settlor’s death. If established for a person eligible for the Disability Tax Credit (DTC), it may benefit from lower, graduated tax rates under current tax rules.

When planning for individuals with disabilities, the goal is typically to preserve access to government benefits like the Ontario Disability Support Program (ODSP). Two trusts are specifically used for this purpose: the Inheritance Trust and the Absolute Discretionary (Henson) Trust.

The Inheritance Trust

In response to advocacy from parents of individuals with disabilities, Ontario introduced the Inheritance Trust on August 1, 1993, later updating it in 1998. It allows a person receiving ODSP to inherit up to $100,000—as long as the inheritance is placed in a trust within six months.

However, there are key limitations:

  • Only $10,000 in a 12-month period can be withdrawn without affecting ODSP, unless funds are used for disability-related expenses.

  • Any unspent income (e.g., interest) from a trust already at the $100,000 limit is deducted from ODSP benefits.

  • These trusts are considered Inter-Vivos Trusts, so they are taxed at the highest marginal rate.

Due to these restrictions, we generally do not recommend Inheritance Trusts as a long-term planning tool. Instead, we suggest using a Henson Trust for greater flexibility and better tax outcomes.

The Absolute Discretionary (Henson) Trust

The Henson Trust is widely recognized in Ontario as the best option for families wishing to leave an inheritance to a loved one with a disability without affecting their ODSP benefits.

What Makes a Henson Trust Unique?

The key feature of a Henson Trust is that the Trustee has absolute discretion over how and when the funds are distributed. This means:

  • The beneficiary has no legal claim to the funds

  • ODSP does not count the trust assets when determining eligibility

  • The trust can provide quality of life enhancements within limits without jeopardizing government support

Henson Trusts can be established during the settlor’s lifetime (Inter-Vivos) or through their will (Testamentary), though the latter is more commonly used due to tax advantages.

The History of the Henson Trust

The Henson Trust originated in Guelph, Ontario in the early 1980s. Leonard Henson, a father of a daughter with developmental disabilities, sought a way to leave his estate to his daughter, Audrey, without disqualifying her from benefits under what is now ODSP.

Working with legal experts and advocacy organizations, Leonard revised his will to include an Absolute Discretionary Trust. After his death, the Ministry of Community and Social Services attempted to revoke Audrey’s benefits, claiming she had inherited assets. The case eventually reached the Ontario Court of Appeal, which upheld the trust’s validity in 1989.

This landmark decision established a legal precedent, giving families across Ontario a powerful tool to support their loved ones with disabilities.

When planning for a loved one with a disability, proper trust setup is essential to protecting their financial future while maintaining eligibility for government support. The Henson Trust—particularly when structured as a Testamentary and Qualified Disability Trust—offers both flexibility and long-term security.

If you are considering establishing a trust, we strongly recommend speaking with professionals who specialize in disability and estate planning.

The Henson Trust & Tax Updates​

The Henson Trust is a type of Absolute Discretionary Trust designed to protect a person’s eligibility for ODSP while still allowing them to benefit from an inheritance.

Since January 1, 2016, most trusts, including Henson Trusts, are taxed at the highest marginal rate unless they qualify as a Qualified Disability Trust (QDT). A Henson Trust can qualify as a QDT if it meets the following criteria:

  • Created upon death (Testamentary Trust)
  • Resident in Canada for the entire year
  • Only one QDT can be designated per eligible beneficiary
  • Has at least one beneficiary who qualifies for the Disability Tax Credit (DTC)

To maintain QDT status, both the Trustee and the Beneficiary must file an annual election with their tax return. Failure to do so or certain changes (e.g., the beneficiary dies or the trust pays out to a non-eligible person) can result in the trust losing its QDT status—and possibly triggering tax recovery.

Challenges

Not all individuals with disabilities qualify for the DTC. For example, people with episodic or cyclical conditions may be excluded, meaning their trust income is fully taxed. Also, only one trust per person can be designated as a QDT, which can be problematic if multiple family members set up Henson Trusts in their wills.

Our advice: Consult a qualified tax accountant and lawyer for personalized guidance. With proper planning, most Testamentary Henson Trusts can still benefit from graduated tax rates.