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TRUST FUNDS FOR PERSONS WITH DIS BILITIESRECEIVING BENEFITS UNDER THE ONT RIO F MILYBENEFITS CT

Gordon H. Andreiuk and Thomas W. Troughton

Introduction: n u s t s for D isabled F .B.A. Allowance RecipientsUnder the current regulations to theFamdy Benejh Act1 (F.B.A.),

F.B.A. allowance recipients are not penalized when they hold a beneficialinterest in certain types of trusts and apply payments from those truststo disability-related expenses. Neither trust capital nor trust income willbe taken into account when calculating eligibility for, or the quantumof, an F.B.A. allowance. In this way, disability-related expenses can beprivately funded through a trust arrangement.

This is a m ajor ch ang e for the O ntario Ministry of Com mu nity

and Social Services (M.C.S.S.), which is responsible for adminis-tering the F.B.A. For some time, the M.C.S.S. considered all assetsheld in trust to be liquid assets which usually took the trustbeneficiary over the liquid-asset ceiling established in the regulationsand made him or her ineligible to receive an F.B.A. allowance.*However, in 1989, two appeal decisions, Ontario Minister ofCommunity Social Services) v Henson3 and Ontario Direct06Income Maintenance Branch) v Powell,4established that discretion-ary trusts a re not liquid asse ts a s defined by the F.B.A. regulations.

Gordon Andreiuk, B.A.(Hons.), LL.B., is a graduate of Queen's University Faculty of Lawand is currently articling in Ottawa with William Simpson, Q.C., L.S.M., of Soloway, Wright,Victor.

Thomas W. Troughton, B.A.Sc., M.Sc., D.I.C., LL.B., is a solicitor in Ontario and hasbeen a sessional lecturer in various disciplines at Queen's University since 1972. Mr.Andreiuk researched and wrote this article at the suggestion of, and in consultation with,Mr. Troughton.R.S.O. 1990, C. F-2.

2 The limits vary from about 2,500 to 6,000 depending on the allowance recipient's familycircumstances.

3(1989), 36 E.T.R. 192 (Ont. C.A.), affg 28 E.T.R. 121, 26 O.A.C. 332, [I9871 O.J. No.1121 (Q.L.) (Div. Ct.), affg (August 22, 1985, S.A.R.B.), unreported.

4(1989), 38 E.T.R. 205, 36 O.A.C. 310, [1989] O.J. No. 2310 (Q.L.) (Div. Ct.); varg(December 19, 1988, S.A.R.B.) unreported. The Divisional Court found that the incomefrom the trust was caught by the definition of liquid assets. S.A.R.B. had held that neitherthe capital nor income of the trust was caught by the definition.

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It was possible to both hold a beneficial interest in assets withina discretionary trust and receive anF.B.A.a l l ~ w a n c e . ~ubsequently,i n 1993, theF.B.A. regulations were amended to includes-s. I ( l)(i),which exempts certain trusts from the definitionof liquid assets,and s. 13(2), para. 49 , which exempts from income calculations anytrust payments applied to disability-related expenses.6

The com bination of these two exemptions provides an excellent wayto privately fund disability-related expenses without negatively affectingthe trust beneficiarysF.B.A.allowance. Such disability-related expensescould include day programmes for the mentally handicappedor homerenovations to improve accessibility for the physically handicapped.

Provided that the expenditures are not reimbursed from some source,the incom e exemption applies. Given this possibility, some people couldchoose to forego publicly funded services and programmes availablefor the disabled, opting instead for private services and programmespaid for through a trust a rrangement. This currently occurs in the healthcare sector when people go outside the public health care system toavoid waiting lists and lengthy delays.

However, the use of private funding to finance disability-relatedexpenses is frustrated by restrictions imposed by the regulations. In short,the trust in which theF.B.A.allowance recipient has a beneficial interest,and from which payments are received, must have a testamentaryaspect, the term used in this article . The regulations distinguish trustsaccording to whether or not the beneficial interest in the assets heldin trust was derived from an inheritance, not according to whether thetrust itself is testamentaryor intervivos. TheF.B.A.recipient can establishan inter v i v a trust using funds from an inheritance; or the donor canestablish the trust through a testamentary document.8 There must havebeen a death.

Three possible explana tions of why thes. 13(2), para. 49 disability-

related-expenses income exemption is limited to testame,tary-aspect trusts are:

Only th e Henson trust was fully discretionary ; the Powell trust wa s not discretionary w ithrespect to the trust income; f footnote 12, infra, for a discussion of the Henson trust.Further in this article, we refe r only to Henson-worded trusts.Regulations made under the Family BenefitsAct, R.R.O. 1990, Reg. 366, as amended by0 Reg. 436/93 , further amended0 Reg. 196194 the (F.B.A. regs.).An M.C.S.S.fact sheet, Trust Funds for People w ith Disabilities Receiving Family Benefits(Ontario: Queens Printer, undated) at p. 2, notes that the following will qualify as derivedfrom an inheritance: funds left on an intestacy and funds received when the person isbeneficiary of a life insura nce policy, R.R.S.P.,G.I.C.and similar instruments.

8 This is the interpretation used in theM.C.S.S.fact sheet,ibid: The funds received [frominheritance] must have already beenor will be placed in trustfor the benefitof the client.


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(i) the Henson and Powell decisions, on whose heels followed thes. l(l)(i) and 13(2), para. 49 exemptions, both dealt withtestamentary trusts;

(ii) the Income Tax AcP discriminates againstinter vivos trusts; and(iii) only deceased friends and relatives need a trust vehicle to m ake

On closer examination , none of these satisfactorily explain why thislimitation was adopted.

In this article, we consider more closely thess. l(l)(i) and 13(2),para. 49 liquid-asset and income exemptions, the importance of thes. 13(2), para. 49 exemption relative to other income exemptionsand w hether theM.C.S.S.is justified in restricting thes. 13(2), para .49 exemption to testamentary-aspect trusts.

financial contributions to an allowance recipient.

The Disability-Related-Expenses Income Exemption

Section 13 2), para. 49 Income Exemption

Section 13 of the regulations defines income very broadly asincluding all payments of any nature or kind whatsoever. Anyincome received by an F.B.A. allowance recipient will lower his

or her allowance dollar for dollar.O A substantial exemption fromthese calculations is provided bys-s. 13(2), para. 49 of theregulations. This subsection exempts any payment* received froma trust of which the F.B.A. allowance recipient is beneficiary, tothe extent that the payment is applied to d isability-related expenses

R.S.C. 1985, c. 1 (5th Supp.).l o F.B.A. regs., s. :

11. The amount of an allowance shall be equal to the budgetary requirements ofan applicantor recipient determined in accordance with section12 or 31, as the casemay be, and section 41, minus the income of the applicantor recipient in accordance

with section 13.. . . any paymen t received by an applicantor recipient by reason of hisor her beneficial

interest in assets held in trust if the beneficial interest is derived from an inheritanceand either exempt as a liquid assetor not a liquid asset and if the payment is appliedto,

i. expensesfor aids, assistive devices, health needs, renovations to the principal residence

l .B.A. regs., s. 13(2), para. 49, exempts:

of the applicantor recipient,or services that,A . are related to th e applicantsor recipients disability, andB. are not a nd will not be otherwise reimbursed,

A. are incurred a s a resultof the applicantsor recipients disability, andB. are not a nd will not be otherwise reimbursed,or

ii. educationor training expenses that,

iii. other disability related expenses up to an annual maximu mof 3,300. Payments can be made up of any combination of trust income and capital.


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1995) Trust Funds for Persons with Disabilities 195

and not reimbursed. However, use of the exem ption is limited. First,the beneficial interest in the trust capital must be derived from aninheritance;i.e., the trust must have a testamentary aspect. Second,the beneficial interestin the trust must be excluded from liquid-asset calculations,i.e.,the trust must be e ither exempt from liquid-asset calcu lations bys. 1(l)(i) or not be a liquid asset at all becauseit is a Henson-worded trust.I3 In short, thes. 13(2), para. 49exemption applies only if the trust has a testamentary aspect andthe beneficial interest in the trust assets is not taken into accountin the liquid-asset calculations.

kusts Which can Take Advantage of the s. 13(2), para. 49Income Exemption

As noted above, to take adv anta geof the s. 13(2), para. 49 incomeexem ption, a trust must either qualify for thes. l(l )(i ) liquid-assetexem ption or be a testam entary Henson-worded trust.

To qualify for thes. I ( l)(i) liquid-asset exemption,I4 a trust must

l A Henson-worded trust is not a liquid asset because the trust is fully discretionary andthe beneficial interest is not available to be used for maintenanceas required by thedefinition of liquid assets in the regulations. The trusteeof the Henson trust had a barediscretion over w hether to m ake any p ayment to the beneficiary, and a fiduciary dutynot to m ake paymen ts if that would low er the beneficiarys income from social assistance.Th e beneficiary had no way to com pel the trusteeto ma ke payments. The Social AssistanceReview Board, the Ontario Divisional Court and the Ontario Court of Appeal all foundthat the beneficial interest in assets held in the discretionary trust was not available formaintenance. The Divisional Court in Henson wentso far as to comment that thebeneficiary does not have a beneficial interest as that term is used in the definition ofliquid assets, Henson,supra footnote3.

When s. 13(2), para. 49 was introduced in 1993 by0 Reg. 436/93,s. 5 5), it did notapply to Henson-worded trusts because it contained the words and available to be usedfor maintenance. Th at phrase w as struck out in 1994 by0 Reg. 196/94,s. 2(2), so thatthe subsection would encompass Henson-worded trusts. See the M.C.S.S. fact sheet,suprafootnote 7, at p. 4, for confirmation that testamentary Henson-worded trusts can use thes. 13(2), para. 4 9 exemption: The incom e exemptionsfor disability-related expenses willbe allowed on Henson trusts. This has been clarified by an amendment tos. 13(2)49made in March 1994 removing the words and available for maintenance which had beenincluded in the A ugust 1993 provision and w hich had the effect of limiting the availabilityof the income exemption.

(i) for the purposes of determining the eligibility of an applicantor recipient for anallowance under clause 7(l)(c) of the Actor under subsection 2(5) of this Regulationand computing the amou ntof the allow ance, the applicantsor recipients beneficial inter estin assets held in trust and available to b e used for m aintenance, if,

(i) the capital of the trust is derived from a n inheritance,(ii) the valueof the capitalof the trust does not exceed,

l F.B.A. regs., s. l ( l )( i) :

(A) 65,000, or(B) such greater amo unt as the Director ma y approve if the applicant or recipient

provides documentation that demonstrates to the satisfaction of the Director


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comply with three conditions: (i) the beneficial interest in the trustcapital must be available for maintenance, (ii) the capital of thetrust must be derived from an inheritance andiii) the value of thetrust capital m ust be less than 65,000 or such a mou nt as approvedby the Director appointed under theF.B.A. The first conditionexcludes Henson-worded trusts since they a re characteristically notavai lab le to be used for maintenan~e. ~he second conditionrestricts the exemption to trusts with a testamentary aspect. Thethird condition places a ceiling on the amount of capital that canbe held in an exem pt trust.A s well, if anF.B.A. allowance recipientholds a beneficial interest in m ore than o ne trust, this ceiling app lies

to the ag gre ga te of the capital of these trusts.Trust arrangements are limited only by the imaginationof thesettlor. However,if the settlor is also theF.B.A. allowance recipientwho is using inherited funds to establish an exem pt trust, he o r shemust consider s. 8 of the F.B.A. regulations, which obliges anallowance recipient to make reasonable efforts to pursue outsidesources of income.6 The section creates an expectation that thesettlor will arrange to have all trust income paid out, whether ornot i t can be applied to disability-related expenses. TheM.C.S.S.takes the position that: While an individual may be permitted toplace funds in a trust, he or she will be expected to have the inco mepaid ou t an d only to the extent that it is spent on disability relateditems will it be exempt as income. If it is not paid out, a deemedamount will be included and the al lowance reduced a ~ co rd in gl y . ~

that the available capital of the trust and the estimated income from the trustare required to meet the applicants or recipients lifetime expenses referredto i n paragraph 49 of subsection 13(2), and

i i i ) the sum of the values of the original capitalof all trusts in the assets of whichthe applicant or recipient has or has had a beneficial interest that has qualifiedas an exempt liquid asset on or after AugustI , 1993 while he or she has beenin receipt of an allowance under clause 7(l)(c) of the Act or under subsection2(5 ) of this Regulation, has not exceeded 65,000 or such greater amount approvedby the Director under sub-clause (ii)(B);

5 C supra footnote 13.16 FBA regs, s. 8:

8. Where the Director is not satisfied that an applicant or recipient is makingreasonable efforts to obtain compensation or realize any financial resource that theapplicant, recipient,or a beneficiaryincluded or t be included in the recipients allowance,may e enrirled t or eligible fo r the D irector may de termine that the applicant, recipientor beneficiary is not eligible fora benefit or the Director may reduce the amount ofan allowance granted by the amountof the compensation, contribution or financialresource, as the cas e may be, that in the Directors opinion is available to the app licant,recipient or beneficiary. [Emphas is added.)

I7M.C.S.S.Fact Sheet,supra footnote7, at p. 4


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T he sec ond type of trust eligible for thes. 13(2),para. 4 9 incomeexemption is a testamentary Henson-worded trust. It fulfils both

requirem ents for the inco me ex emp tion: it hasa testamentary aspectan d the beneficial interest in the trust assets is not taken into accou ntin the liquid-asset calculations.

Relative Importance of the Disability-Related-Expenses IncomeExemption

If a trust is not eligible to use thes. 13(2), para. 49 incomeexem ption, it will have to rely o n other incom e exemptions provided

in the regulations. Only two other income exemptions can applyto trust payments, and they are small, relative to the disability-related-expenses exemption. These exemptions are casual gifts ofsmall values ere the trustee to buy gifts for the trust beneficiary

nd casual p aym ents of small value.IyThese two exemptions are not substantial. First, the gift or

payment must be of small value.20 Second, it must be givenirregularly. If given regularly, it will likely taken into account inthe in co m e calculations.

Th e d isability-related-expenses exemption, on the other hand, ca nbe very substantial. First, there is no limit on the amount that canbe spent on prescribed disability-related expenses. An M.C.S.S. factsheet lists even the followingas prescribed expenses: a modifiedvehicle, expenditures towards an accessible new residence, educa-tion an d training exp enses which are required to improve employ a-bility . . . attendant care , hom em akin g services, meals on wheels,home/yard maintenance and cost of attendinga day program.21Second, these payments can occur regularly. Cumulatively, theseexpenditures can am ount toa large ann ual income exemption. Touse the s. 13(2),para. 4 9 exe mption , the F.B.A. allowance recipientor his trustee must file an annual income and expense transactionreport with &heF.B.A. Director.22

I F.B.A. regs.,s. 13(2), para. 27 e xem pting casual gifts of small value.I y F.B.A. regs.,s. 13(2), para. 2 8 exem pting casual paym entsof small value.2n However, the M.C.S.S.fact sheet, supra footnote 7, at p. 5 lists even furniture as a gift

I Ibid.22 F.B .A. regs., s 13(13) (as am .0 Reg. 436193,s. 5(7):

eligible for this exemption.

13(13) The exemption from income under paragraph 49 of subsection (2) appliesif the applicant or recipient files an annual report in a form satisfactoryto the Director

documenting all income and expense transactions relatingto the assets held in trustfor the year in respecto f which the report is filed.


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would not contradict that reasoning if faced with an identical trustdeclaration but aninter vivos trust.

TheHenson

andPowell

decisions a re not a satisfactory explanationfor why the F.B.A. regulations restrict thes. 13(2), para. 4 9 disability-related-expenses income exemption to trusts with a testamentaryaspect.

The Income Tax ct Discriminates gainst Inter Vivos Busts

T h e Income Tux Act (I.T.A.) does discriminate againstinter vivostrusts to a limited extent. All incomeof an inter vivos trust allowedto accumulate in the trust will be taxed at the highest federal rate,whereas the accumulating income of a testamentary trust will betaxed on a progressive basis. However, this discriminatory taxtreatment is easily avoided. There will be no discrimination if theincome from an inter vivos trust is paid out to the beneficiary, orif there has been a preferred beneficiary election.

Section 122(1) of the I.T.A. imposes the maximum federal taxrate on the accumulating income of aninter vivos trust. But if theincom e flows through the trust, it will be taxed in the hands of thetrust beneficiary as personal income.24Section 104( 14) of th e I.T.A.p e r m i t s a p r e f e r r e d b e n e f i ~ i a r y ~ ~o pay tax on all or part of theaccumulating trust income. Th e income of theinter vivos trust willbe taxed as though in the hands of the beneficiary while actuallyaccum ulating in the trust. This provision w as recently a m en de d bythe 1995 federal budget: it is now available only to mentally orphysically disabled p referred beneficiaries.26

While the I.T.A. does discriminate againstinter vivos trusts, inpractice, there need not be any difference in the tax treatment ofinter vivos or testamentary trusts, especially where the beneficiaryis disabled. Discrimination in the I.T.A. againstinter vivos trusts

and capital of the residue of my estate were not paid to her for her own benefit,or ifsuch payments were limited to an amountor time. In order to maximize such benefits,1 specifically authorize my Trustees to make payments varying in amounts and at suchtime, or times, as my Trustees in the exercise of their absolute discretion may considerin the best interest of my said daughter.

?4 Note, however, that there will be attribution of trust income back to the settloddonorifthe trust beneficiary is the settlors spouseor a non-arms-length minor,i e . , a minorchild or niece or nephew.I.T.A., s. 74.1( 1) and (2)

z 5 Preferred beneficiary is defined ins. 108 1) of the I.T.A. as the settlor of the trust,spouse and former spouse of the settlor, children, grandchildren and great-grandchildrenof the settlor or settlors spouse.

Z h Department of Finance,Budget n Brkf(0ttawa: Canada Communications Group,1995),at p. 18.


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does not explain why the regulations restrict thes-s. 13(2), para.49 disability-related-expenses income exemption to trusts with a

testamentary aspect.

Belief that Only Deceased Donors need to Use Trusts

T he drafters of the F.B.A. regulations m ay have believed that onlydecease d donors need a trustee to act in their placeto provide fundsto an allowance recipient. They may have presumed that livingfriends an d relatives can have con tact with the allowance recipient,know w hen the allowa nce recipient requires financial assistance andm ak e contributions accordingly.

This completely ignores the problem of income calculations andthe fact that thes-s. 13(2), para .49 income exemption he mostsubstantial income exem ption would be unavailable. If a tes-tamentary-aspect trust cannot be established, any contributionsreceived by the F.B.A. allowance recipient would haveto rely onthe exem ptions for casual giftd paym ents of small value.

This presumption also ignores the reality that many friends andrelatives have little or no contac t with the allowa nce recipients theyare willing to help. They live in different provinces or countries,are unable to visit, have other, mor e pressing responsibilities or havechosen to distance them selves from the allow ance recipient. Friendsand relatives may be willing to contribute financial aid to theallowance recipient, but are unable or unwillingto maintain thecontact required to know when financial aid is necessary. Theywould like to appoint a trustee responsible for having regular con tac twith the beneficiary an d providing financial assistance a s needed.

T he au thors believe that m any living potential donors a re in thisposition and need recourseto trust arrangements in order to m ak econtributions toa disabled F.B.A. allowance recipient.

Noneof

the above three possible explanations is convincing.

Conclusion: Limitation of the s. 13(2),para. 49 IncomeExemption is Unwarranted

As noted above, thes. 13(2), para .49 disability-related-expensesincome exemption applies to trust payments received from certaintypes of trusts. The trust must have a testamentary aspect and thetrust capital must not be taken into account in calculating liquidassets. This restricts the useof the s. 13(2), para. 49 exemption to

two types of trusts: those whichfit the s. l(l)(i) liquid-asset


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exemption and testamentary Henson-worded trusts. Trusts estab-lished by a living friend or relative, or by theF.B.A. allowance

recipient using fun ds received fro m a living friend o r relative, cannotuse the exemption.There does not appear to be a convincing explanation of why

such a substantial income exemption should be limited to testa-mentary-aspect trusts. This limitation is unfair and unwarranted.It is prejudicial to disabledF.B.A. allowance recipients whosemisfortune it isto have only living friends and relatives willingtocontributeto their disability-related expenses. Regular o r substantialfunding from the living would be classified as income, would notfit any income exemption and would lower the disabled personsF.B.A. allowance.

If the purpose of the recent am end me ntsto the F.B.A. regulationswas to permit private funding of allowance recipients disability-related expenses, it is inconsistent to then have the regulationsdiscriminate against trusts which do not have a testamentary aspect.Trusts of non-testamentary aspect are a potentially rich source ofprivate funding for disability-related expenses. If living friends andrelatives are willing to contribute funds that could be used fordisability-related expenses, thes. 13(2), para. 49 income exemptionshould b e available in that situation as well.

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