Qualified Disability Trust in Ontario: Tax Rules and Eligibility

If you are the trustee of a trust for a person with a disability, the tax bill can be a surprise. Most trusts do not enjoy the graduated tax brackets that individuals do, and that can make a real difference to how far the trust's money goes.

A qualified disability trust is a special category that gets graduated rates, but only if strict conditions are met each year. This article explains who qualifies, how the election works and what a trustee should watch. Rates and thresholds change, so confirm current figures with an accountant.

Why the trust label matters for tax

For income tax, a trust is either testamentary or inter vivos. A testamentary trust is generally created on and as a result of an individual's death, for example under a will or estate. An inter vivos trust is any trust that is not a testamentary trust.

Under section 122(1) of the Income Tax Act, tax on a trust other than a graduated rate estate or qualified disability trust is the highest individual percentage rate for the year multiplied by the trust's taxable amount, so ordinary inter vivos and ordinary testamentary trusts pay tax at the top rate with no graduated brackets. A QDT is the exception: it is taxed at graduated rates.

Who qualifies as a qualified disability trust

There are conditions on the trust and on the beneficiaries. At year end the trust must be a testamentary trust arising on a particular individual's death and resident in Canada, and its return must include an election made jointly with one or more beneficiaries, including their SINs.

Each beneficiary who joins in the election must meet three conditions:

• The beneficiary must be named by the deceased in the instrument creating the trust.
• The beneficiary must qualify for the disability tax credit under section 118.3 for the year.
• The beneficiary must not jointly elect with any other trust for a year ending in the same beneficiary year.

Because the test applies each year, a trust that qualifies one year may not the next. A trust created by someone during their lifetime is inter vivos, and since a QDT must be testamentary, it would not fit.

QDT, graduated rate estate and ordinary trust compared

People often confuse a QDT with a graduated rate estate (GRE). They are different. A GRE is an estate, and it can only keep that status for up to 36 months after death. A QDT is a trust that arises on death and can continue as long as it meets the yearly conditions.

Some GRE-only features do not carry over to a QDT. For example, only a GRE is exempt from tax instalments for 2016 and later years, and only a GRE can make the section 164(6) election to carry certain first-year losses back to the deceased's final return.

Making the election and filing

A QDT is elected on Form T3QDT and uses trust code 904. The election is part of the trust's return, so it needs to be dealt with when the T3 is prepared rather than afterwards.

A T3 return and any balance owing are due no later than 90 days after the trust's tax year-end. A resident express trust that is not a listed trust must file a T3 every year, even with no income. Trusts that file also generally need to include Schedule 15 beneficial ownership information, unless they are listed trusts.

If a T3 is filed late and there is no unpaid tax at the deadline, the penalty is $25 a day, with a minimum of $100 and a maximum of $2,500. A person who knowingly or through gross negligence makes a false statement or omission, or fails to file, under the trust reporting rules may face a penalty of the greater of $2,500 and 5% of the highest fair market value of trust property in the year, though not for listed trusts.

Income that the trust pays out to a beneficiary is taxed differently from income it keeps. A trust can deduct income that becomes payable to a beneficiary in the year, and the beneficiary includes that amount in their own income. How that interacts with a QDT election is a point to review with an accountant.

What to do next

• Read the will or trust document to see whether the trust arose on a death and whether the beneficiary is named in it.
• Confirm whether the beneficiary qualifies for the disability tax credit for the year.
• Check that the trust is resident in Canada at year end.
• Gather the beneficiary's SIN, since it must be included with the election.
• Set the T3 deadline 90 days after the year-end in your calendar.
• Ask an accountant to prepare Form T3QDT and confirm current rates.
• Speak to a lawyer if the document is unclear or the beneficiary also receives ODSP, since benefit rules are separate.

Frequently asked questions