It's Your Money  

Inheritances for disabled: 2

In last week’s column, I started the conversation on leaving inheritances to people living with disabilities by reviewing Henson Trusts.

In the second half of this column, I wanted to review three other ideas to consider:

A Qualifying Disability Trust (QDT) meets certain conditions set out in the Income Tax Act (Canada).

If a trust generates income that it is not paid or made payable to a trust beneficiary, that income is taxable to the trust at the top marginal tax rate for individuals in that province or territory.

A QDT trust can have its income taxed at the same graduated rates of tax as are available to individuals. Among other things, in order to qualify to be a QDT:

  • The trust must be testamentary (i.e. created as a consequence of the death of the settlor, typically by the terms of the settlor’s will),
  • At least one of the beneficiaries of the trust must: qualify for the federal disability tax credit; be specifically named as a beneficiary of the trust in the will, and not already be the beneficiary of a different QDT
  • The disabled beneficiary of the trust and the trustee of the trust must make a joint election with the Canada Revenue Agency to treat the trust as a QDT.

Depending on your province or territory, it may be possible for a particular trust to be a Henson trust and a QDT at the same time. Speak to your qualified professional adviser about whether Henson trusts and/or QDTs have a place in your estate plan.

Avoid using direct beneficiary designations

If your estate plan involves the use of a trust (whether a fully discretionary trust or otherwise) for the inheritance of a person with disabilities, then you should not designate that individual as direct beneficiary to any plans or policies.

If you reside in a common-law province or territory, you should not own assets in joint tenancy with him or her.

You will generally want assets to flow into your estate so that the trust conditions contained in your will apply to those assets. Assets flowing outside of the estate will not be subject to the terms and conditions of your will.

Registered Disability Savings Plans (RDSPs)

RDSPs are savings plans designed for the long-term financial security of persons with disabilities. Contributions up to certain annual limits may be eligible for federal grants, and RDSPs for beneficiaries with a low income may qualify for federal bonds. An RDSP may be established for a beneficiary who:

  • Is eligible for the federal disability tax credit,
  • Is a resident of Canada,
  • Has a valid Social Insurance Number, and
  • Is turning 59 or younger.

RDSP contributions can be made until the end of the year the beneficiary turns 59, but grants and bonds can only be received in years when the beneficiary turns 49 or younger.

RDSPs can receive up to $200,000 in private contributions, up to $70,000 in federal grants, and up to $20,000 in federal bonds.

Most provinces and territories fully or at least partially exempt the value of an RDSP from social assistance asset tests, and fully or partially exempt the value of RDSP withdrawals from income tests.

A large lump sum contribution to an RDSP may be disadvantageous, especially when it concerns the federal grants available. Typically, it is better to contribute to an RDSP gradually over time rather than all at once.

Thus, if you are planning to leave an inheritance to a person with disabilities, you will likely still want to make use of a discretionary trust.

The trustee will be able to use the trust funds to make RDSP contributions on behalf of the person where the trustee considers it appropriate.

Creating estate plans that include people with disabilities can be complex so take the time to learn about the options available and get it done right.


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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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