Henson Trusts: Supreme Court Clarifies and Approves

Introduction: What is a Henson Trust?

A Henson trust is a type of trust that is settled for the purpose of benefitting a person with disabilities. The purpose of a Henson trust is to provide supplemental income for a disabled beneficiary, while still keeping them within the acceptable limits required so that they can continue to earn income support from various government programs such as the Ontario Disability Support Program (“ODSP”). Many other governmental programs use income tested eligibility as well.

By keeping the trust assets separate from those of the beneficiary, a Henson trust can serve to provide the maximum supplementation for a disabled beneficiary while not running afoul of the income tested requirements of programs such as ODSP. The name comes from the famous 1989 Ontario Court of Appeal Case Ontario v Henson. Recently the Supreme Court of Canada had its first opportunity to weigh in on the concept and its guidance suggests that Henson trusts should be a legitimate planning tool for the foreseeable future.

SA v Metro Vancouver Housing Corp.: Henson Trusts Come Under Fire

Henson trusts have become a ubiquitous tax planning tool since their creation decades ago; their use has expanded into most areas where government payments, subsidies and eligibility requirements are based on of a person’s income. Recently, the Supreme Court of Canada was tasked with determining their legitimacy in the context of social housing in S.A. v Metro Vancouver Housing Corp. In this case, A, a person with disabilities, had resided in subsidized housing in Vancouver since the early 1990’s. She had further received rental assistance payment from the Metro Vancouver Housing Corporation during this period. Every year she was required to provide an income statement to verify her income to prove that she qualified for the rental assistance payments.

In 2012, a Henson trust was settled for her benefit that provided that two co-trustees (A and her sister) together would have the discretion to pay as much of the income or capital as they decided was necessary or advisable for the care, maintenance, education or benefit of A. When the housing authority learned of the trust it asked that the balance be disclosed, to which A refused. As a result, the housing authority advised that it was unable to approve her application for rental support payments as the trust was an asset and its value needed to be included in the determination for her eligibility. In response to the decision both A and the housing authority made applications to the Supreme Court of British Columbia for a determination on the status of the trust as an asset of A. The case gradually wound its way to the Supreme Court of Canada which allowed an appeal in order to opine on the concept for the first time.

The Supreme Court of Canada Provides its Approval and Guidance

At hearing the British Columbia courts had held that the term “assets” as used in A’s tenancy agreement was broad enough to encompass the trust, a decision that the BC Court of Appeal upheld. However, the Supreme Court of Canada took a different tack and sided with A. In so doing, the Supreme Court of Canada clarified that the effectiveness of a Henson trust for the purposes of social assistance testing is reliant on two factors:

1) In order for a trust to be a proper Henson trust, it must include the following terms:

• The trustees must have complete and unfettered discretion to determine when distributions are made to the beneficiary;
• The beneficiary cannot have any ability or right to compel the payment of distributions; and
• The beneficiary cannot unilaterally collapse the trust.

2) The social assistance program itself can specifically include Henson trusts in its eligibility requirements. In other words, social assistance programs such as the ODSP can tailor themselves to require any interest in a Henson trust to be reported and considered an asset of the applicant. This means that careful drafting of the eligibility requirements of these programs could lead to Henson trusts being utilized in means-based tests for eligibility.

In A’s case, the terms of the trust were onside and as the housing authority’s tenancy agreement used a broad and not specific definition of property the trust was to be excluded in determining her eligibility for rental support payments.

Trust Tips: Careful Drafting is Required

If you have a disabled friend, family member or dependant who relies upon social assistance programs, and you want to ensure that they are provided for after you are gone, reach out to our experienced tax law firm for guidance. As the Supreme Court of Canada has clarified, careful drafting must be utilized to ensure that your Henson trust stays onside of the common law rules as well as the rules of any individual program your relation may rely upon.

As an example, for now ODSP seems like a safe program, as Henson trusts are specifically recognized as a legitimate tool and a non-asset for its eligibility purposes. However, this could change at any time in the future now that the Supreme Court has provided a simple road-map for this type of exemption. In addition, our experienced Canadian tax lawyers keep abreast of any changes to the various programs and can structure your trust in such a way as to maximize tax savings for beneficiaries that other law firms with less focus can provide.

About the Author

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David J. Rotfleisch

David J. Rotfleisch, a leading Canadian tax lawyer, is not only a certified specialist in taxation but also a chartered professional accountant. Most recently, David is a pioneer in Canadian crypto taxation.

As of April 2020, he was one of 12 Ontario Certified Specialists In Taxation™.

Learn more about David J. Rotfleisch