How is a Henson trust taxed, and when can it use graduated rates?
For 2026, a Henson trust pays a flat 33% federal tax on income it keeps, unless it arose under a will and elects with the disabled beneficiary on Form T3QDT to be a qualified disability trust, taxed at the graduated 14% to 33% rates. Income paid to the beneficiary in the year is taxed to them.
Which rate applies to income a Henson trust keeps?
A Henson trust is taxed like any other personal trust: section 122(1) taxes every trust at the highest individual percentage on all its taxable income, and the only exceptions are a graduated rate estate and a qualified disability trust (QDT) laws-lois.justice.gc.ca. For 2026 that top rate is 33% on income above $258,482
canada.ca. Provincial tax comes on top of every figure on this page.
| How the trust is set up | Federal rate on income it keeps (2026) | Minimum tax basic exemption | Recovery tax later |
|---|---|---|---|
| Created by will, QDT election filed for the year | 14% to 33%, individual brackets | Yes | Yes, when QDT status ends |
| Created by will, no QDT election | 33% on every dollar | No | No |
| Living (inter vivos) trust | 33% on every dollar | No | No |
| Income paid to the beneficiary in the year, any setup | Taxed to the beneficiary at their own rates | Not applicable | No |
The election is the whole game. The T3 guide confirms that a QDT is taxed on its taxable income at the individual rates, while other trusts pay 33% canada.ca. For alternative minimum tax, section 127.51 gives the basic exemption, set at the start of the 29% bracket, only to an individual other than a trust or to a QDT
laws-lois.justice.gc.ca; the 2025 T3 guide puts it at $177,882 for 2025
canada.ca, and the 2026 brackets put it at $181,440 for 2026
canada.ca. Either way the trust gets no basic personal amount, because section 122(1.1) limits a trust to the donation, pension and dividend tax credits
laws-lois.justice.gc.ca. The trust tax rate page covers the flat rate in more detail.
What makes a Henson trust a qualified disability trust?
The definition is in section 122(3), and it is tested every year laws-lois.justice.gc.ca. All of these must hold for the trust year.
| Condition | What it means for a Henson trust |
|---|---|
| Testamentary trust at year end that arose on an individual's death | A trust a parent set up while alive can never qualify |
| Resident in Canada for the year | Trustees' residence matters |
| Joint election with one or more beneficiaries, in prescribed form, with each one's SIN | Form T3QDT, filed with the T3 return every year |
| Each electing beneficiary was named as a beneficiary by the deceased in the will | A beneficiary added later can't elect |
| Each electing beneficiary meets the disability tax credit tests in 118.3(1)(a) to (b) | The T2201 must be approved and on file for that year |
| The beneficiary doesn't elect with any other trust for the same year | One QDT per disabled person |
| The recovery tax in 122(2) doesn't apply to the trust for the year | The year status ends is never a QDT year |
The disability test points to 118.3(1), which requires a severe and prolonged impairment and a certificate filed with the Minister for the year laws-lois.justice.gc.ca. See the disability tax credit page for the 2026 amounts and the T2201. The CRA form is T3QDT, Joint Election for a Trust to be a Qualified Disability Trust
canada.ca, and a QDT uses trust type code 904 on the T3 return
canada.ca.
The gotcha accountants hit most: both parents leave a Henson trust for the same child in separate wills. Only one of them can make the election for any year, because the beneficiary can elect with one trust only. Merging the gifts into one trust in both wills avoids the problem.
How much does QDT status save on $40,000 of income?
Worked example: a Henson trust created by your client's mother's will earns $40,000 of interest in its 2026 tax year. The trustee pays $10,000 to the disabled son during the year and keeps the other $30,000.
The $10,000 is deductible by the trust under 104(6)(b) and included in the son's income under 104(13). Section 104(24) treats an amount as payable only if it was paid in the year or the beneficiary could enforce payment laws-lois.justice.gc.ca. In a Henson trust the beneficiary can't force a payment, so income the trustee didn't pay out stays taxable in the trust.
| Calculation, 2026 federal | QDT election filed | No QDT election |
|---|---|---|
| Income kept in the trust | $30,000 | $30,000 |
| Rate | 14% (first bracket, up to $58,523) | 33% |
| Federal tax on kept income | $4,200 | $9,900 |
| $10,000 paid to the son | Taxed on his return via a T3 slip | Taxed on his return via a T3 slip |
The federal saving is $5,700 for the year, using the 2026 brackets canada.ca. The saving grows with income until the trust's kept income reaches the 33% bracket. Without a will, a living Henson trust would owe the $9,900 with no way to elect.
When does the recovery tax claw the saving back?
Section 122(2) switches on the recovery tax for a year when a trust that was a QDT in an earlier year hits any of three triggers laws-lois.justice.gc.ca.
| Trigger in 122(2) | Typical Henson trust event |
|---|---|
| (a) No beneficiary at year end was an electing beneficiary for an earlier year | The disabled beneficiary has died and the remainder beneficiaries hold the trust |
| (b) The year ended just before the trust stopped being resident in Canada | Trustees move abroad |
| (c) Capital is paid to a beneficiary who isn't an electing beneficiary | A distribution to a sibling or other remainder beneficiary |
The tax under 122(1)(c) is roughly the difference between the federal tax the trust would have paid at the top rate in its QDT years and the tax it actually paid. Amounts paid to the electing beneficiary out of that income, and the tax on them, come off the top rate figure first laws-lois.justice.gc.ca. It goes on line 11 of Schedule 11, worked out on Form T3QDT-WS
canada.ca.
Continuing the example: if the $30,000 kept in 2026 is never paid to the son and passes to his sister after his death, the recovery tax for that year is $9,900 minus $4,200, or $5,700 federal. Paying accumulated income to the son while he is alive shrinks the clawback, so trustees who want the graduated rate saving to stick should spend on the beneficiary first and distribute to the remainder beneficiaries last.
What does Ontario ODSP count from a Henson trust?
Disability assistance rules are provincial, and Ontario's are the ones the Henson name comes from. ODSP Directive 4.7 says a true absolute discretionary trust is not an asset for ODSP purposes, so its capital can exceed the $100,000 cap that applies to other trusts funded by an inheritance or life insurance ontario.ca. The directive also warns that giving trustees discretion doesn't by itself make a trust absolutely discretionary; the whole will and trust are read.
| ODSP rule (Ontario, as of October 2026) | Amount |
|---|---|
| Absolute discretionary trust counted as an asset | No, no capital limit |
| Other trusts from inheritance or life insurance, with insurance cash value | Exempt up to $100,000 combined |
| Payouts from a Henson trust, any purpose | Exempt up to $10,000 in a 12 month period |
| Payouts for approved disability related items, services, education or training not reimbursed | Exempt |
| Payouts used to contribute to the beneficiary's RDSP | Exempt |
| General asset limit, single recipient | $40,000 |
ODSP treats a payment from a Henson trust as a voluntary payment, because the trustee has no obligation to make it ontario.ca. The $40,000 asset limit is for a single recipient, $50,000 for a couple
ontario.ca. Other provinces run their own programs with their own trust rules, so check the province where the beneficiary lives.
The tax and benefit rules pull the trustee in different directions. Paying income out moves the tax to the beneficiary but counts against ODSP limits unless an exemption applies. The preferred beneficiary election in 104(14) does the opposite: the trust and a preferred beneficiary jointly elect to tax part of the trust's accumulating income to the beneficiary while the money stays in the trust laws-lois.justice.gc.ca. A preferred beneficiary must be resident in Canada, meet the disability tax credit tests (or be an adult dependant with an infirmity and low income), and be the settlor, a spouse or former spouse, or a child, grandchild or great grandchild of the settlor
laws-lois.justice.gc.ca. File the election no later than 90 days after the trust's year end; a late election means the income is taxed in the trust, and the elected amount goes on a separate T3 slip
canada.ca.
How does an RDSP fit beside a Henson trust?
The two work as a pair. In Ontario, RDSP assets are exempt for ODSP with no maximum, and withdrawals for any purpose are exempt as income ontario.ca. A Henson trust payment used to contribute to the beneficiary's RDSP is exempt too
ontario.ca.
On the tax side, RDSP contributions aren't deductible, withdrawn contributions aren't income, and the grant, bond and investment income are taxed to the beneficiary when paid out canada.ca. The RDSP withdrawal formula sets how much of each payment is tax free. Anyone can contribute with the plan holder's permission, the lifetime contribution limit is $200,000, and contributions can continue until December 31 of the year the beneficiary turns 59
canada.ca. So a trustee can move up to $200,000 of trust capital into the RDSP over time, attract the matching grant and bond while the beneficiary is 49 or younger, and keep the rest in the trust. The 2026 grant and bond rates are on the RDSP grant and bond page.
Sources
Does the 21 year rule apply to a Henson trust?
Yes. Section 104(4)(b) deems the trust's capital property sold at fair market value 21 years after the trust was created, then every 21 years laws-lois.justice.gc.ca. Rolling property out to the beneficiary under 107(2) avoids the trust tax, but the property then sits outside the discretionary trust, where ODSP's $40,000 single asset limit can bite
ontario.ca. See the 21 year rule page.
Can a Henson trust claim the principal residence exemption on a house it holds?
Yes, if it is a QDT for the year and an electing beneficiary is resident in Canada, is a specified beneficiary of the trust, and is the settlor's spouse, common law partner, former spouse or partner, or child laws-lois.justice.gc.ca. A living Henson trust can't use this route. See the principal residence exemption.
Who reports the income the trust pays out?
The beneficiary does. The trust deducts amounts paid in the year under 104(6)(b), and the beneficiary includes them under 104(13) laws-lois.justice.gc.ca, using the T3 slip the trust issues. The boxes are explained on the T3 slip page.
Is a lifetime benefit trust the same as a Henson trust?
No. A Henson trust is defined by the trustee's absolute discretion, which is what keeps it outside provincial asset tests. A lifetime benefit trust is a tax term for a trust that receives RRSP or RRIF proceeds for a dependent child or spouse with an infirmity. See the lifetime benefit trust page.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.