How is a Henson trust taxed if it's set up for a disabled beneficiary in Ontario?

A Henson trust isn't a separate category under the Income Tax Act — for federal tax purposes it's taxed like any other trust, following the same rules that apply based on how and when it was created. If it's a testamentary trust and the disabled beneficiary is eligible for the disability tax credit, it may be able to elect qualified disability trust status and use graduated tax rates; otherwise, like most trusts, it's taxed at the top marginal rate with no personal exemption on income it keeps, while income paid out to the beneficiary is generally taxed in their hands instead.

What makes a Henson trust distinct is provincial, not federal: because the trustee has absolute discretion over whether and when to pay anything to the beneficiary, the beneficiary has no enforceable right to the trust property. That structure is what allows a disabled beneficiary in Ontario to keep receiving Ontario Disability Support Program benefits without the trust assets being counted against ODSP's asset limits — a benefits-eligibility feature, not a special tax rate.

Because the tax treatment and the ODSP protection depend on getting the trust's terms and its creation exactly right, this is worth setting up with both tax and disability-planning advice.