Canada: Henson Trusts – Effects Of Changes To The Ontario Disability Support Program — A Toronto Tax Lawyer Analysis

Last Updated: October 2 2018
Practice Guide by Jamin Chen

Introduction - What is a Henson Trust?

A Henson trust is an Ontario specialty which received its name from the case The Minister of Community and Social Services v Henson, [1987] OJ No 1121, aff'd [1989] OJ No 2093 (Ont CA). Essentially, the Henson trust arose as a way of being able to supplement a disabled individual's income while still qualifying for the Ontario Disability Support Program (ODSP). The ODSP provides various types of income including monthly financial assistance and extended healthcare benefits like expanded drug coverage and vision care, as well as employment support by providing services and support to help individuals with disabilities find and keep a job. In order to qualify for the ODSP, the individual must of course have a qualifying disability, but the regulations also impose an asset limitation. Originally the asset limit was set at $5,000 for a single individual and $7,500 if the individual had a spouse, though the limit was raised in 2017 to $40,000 for a single individual and $50,000 for an individual with a spouse with a further increase of $500 per dependant child. That said, certain assets are exempted from being included in the asset limit calculation – most notably, the individual's principal residence and one motor vehicle do not need to be included. With these stringent requirements, the Henson trust is used to hold assets which can be used to help provide financial support for the ODSP recipient without being included towards the asset limit

How Does a Henson Trust Work?

Normally a beneficiary interest in a trust is included in the individual's assets; however, assets held in a Henson Trust are not counted towards the asset limit due to the way they are structured. Specifically, the trust must be 1) fully discretionary – meaning that the Trustee(s) of the trust have full ability to decide whether to distribute trust income or assets as well as how much; 2) the assets must not vest in the beneficiary; and 3) there must be a gift-over of the trust property on the death of the beneficiary to another individual as determined by the settlor of the trust. Since the beneficiary has no vested right to the trust property, nor can he force the trustee to pay out any of the trust property, that beneficial interest can avoid being included in the individual's asset calculation for the purposes of the ODSP. Often Henson trusts are set up by parents or families of disabled children to help provide for the disabled children once the parents are gone. Speak to one of our top Toronto tax and trust lawyers to learn more about the Henson trust and ODSP

Anticipated Changes – Removal of the Gift Limit and Exemption of RRSP and TFSA accounts

Beyond the asset limitation, there is a currently a limit of $10,000 that an individual can receive from gifts or other voluntary payments, including distributions from a Henson trust, before losing his ODSP benefits. This limit is also the main drawback of the Henson trust, as it is only able to distribute up to $10,000 for any 12 month period to the beneficiary, which is many cases is insufficient. The ODSP limits on assets and gifts have long been criticized for essentially preventing its recipients from saving for the future or their retirement, as well as severely limiting their ability to have more than the bare necessities. While the exemption for a principal residence is helpful, for those that cannot afford to buy their own home, the limit on gifts and voluntary payments means that recipients often have difficulty affording more than the most low budget housing. Furthermore, with the current $10,000 gift limit, taking into account both the ODSP benefit and the gift, recipients would often already be hard pressed to maintain a reasonable standard of living, much less be able afford a vacation or plan for the future

However, as of November 1, 2018, the gift limit will be removed, and RRSPs and TFSA balances will also be exempted from the asset limit. As such, as long as a disabled individual is below the asset limit and spends any gifts or voluntary payments he receives that would put his over the limit within 6 months, he will continue to qualify for ODSP. This is a major change to the existing policy and will significantly increase the usability of Henson trusts as the major drawback has been removed and disabled beneficiaries of a Henson trust will no longer be limited in what they are able to receive

Tax Tip – A Henson Trust for the Middle Class

Henson trusts are not always the best solution for every situation. For those who are particularly wealthy, the ODSP requirements as well as the inherent limitations of a Henson trust can be unnecessarily restrictive and may outweigh the benefits of the ODSP, especially where there are enough funds to fully support the disabled individual. The Henson trust structure is most relevant to the middle class family, as they may not have the means to fully support a disabled individual for their entire lifetime. Thus, the ODSP benefits represent a significant and vital source of support over the lifetime of the individual and the Henson trust can be used to provide supplemental income in order to better ensure that the disabled individual is provided for and can maintain a reasonable standard of living. Our experienced Toronto law firm can help you determine if a Henson trust would be appropriate for your situation and make sure everything is set up properly to give you peace of mind.

The information is thought to be current to date of posting. Income tax law changes frequently and content may no longer reflect the current state of the law. This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

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