A Canadian Testamentary Trust Declaration is a legal document that sets out the terms and conditions for a trust to be established through the Testator’s Last Will and Testament, taking effect only upon the Testator’s death. Unlike an inter vivos (living) trust, which is created during the Settlor’s lifetime and operates immediately, a testamentary trust does not come into existence until the Testator dies and the estate is administered. The trust is funded from the deceased’s estate, and the appointed Trustee manages and distributes the trust property according to the Declaration’s terms.

Under Canadian law, testamentary trusts are defined in the Income Tax Act (Canada) s. 108(1) as trusts that arise on and as a consequence of the death of an individual. Since the 2016 amendments to the Income Tax Act, testamentary trusts are generally taxed at the top marginal rate, eliminating the previous advantage of graduated rates. However, the Graduated Rate Estate (GRE) designation under ITA s. 248(1) allows a deceased’s estate to benefit from graduated tax rates for up to 36 months after death, provided the estate meets specific criteria including providing the deceased’s Social Insurance Number and designating itself as the GRE.

Testamentary trusts serve several critical estate planning purposes in Canada. A spousal trust under ITA s. 70(6) allows capital property to roll over to the trust at the deceased’s adjusted cost base, deferring capital gains tax. A Henson Trust (absolute discretionary trust) protects disabled beneficiaries’ eligibility for provincial disability benefits like ODSP (Ontario), PWD (British Columbia), and AISH (Alberta), as confirmed by the Supreme Court of Canada in S.A. v. Metro Toronto Community Services (2006 SCC 27). Trusts for minor children allow assets to be managed professionally until the children reach specified ages, protecting them from receiving large inheritances before they are mature enough to manage them. The trust is governed by the provincial Trustee Act (e.g., Ontario Trustee Act R.S.O. 1990, c. T.23; BC Trustee Act R.S.B.C. 1996, c. 464) and the Wills Act of the Testator’s domicile.

A Testamentary Trust Declaration is needed whenever a Canadian resident wants to ensure that their estate assets are managed and distributed according to specific conditions after their death, rather than being distributed outright to beneficiaries. The most common scenario is a spousal trust: when the Testator wants to provide for their surviving spouse during the spouse’s lifetime while preserving the capital for children or other beneficiaries upon the spouse’s death. The ITA s. 70(6) rollover available for qualifying spousal trusts can result in significant tax savings by deferring capital gains on the deceased’s terminal return.

Families with minor children should strongly consider a testamentary trust. Without one, an inheritance left to a minor is typically held by the Office of the Children’s Lawyer (Ontario) or the Public Guardian and Trustee until the child reaches the age of majority (18 in most provinces, 19 in BC and Nova Scotia), at which point the entire sum is paid out. A testamentary trust allows the Testator to specify staged distributions (e.g., one-third at 25, one-third at 30, remainder at 35) and authorize the Trustee to use trust funds for the child’s education, health, and maintenance in the meantime.

A Henson Trust is essential for any Testator who has a beneficiary receiving provincial disability benefits. Without the absolute discretionary structure of a Henson Trust, an inheritance could disqualify the beneficiary from programs like ODSP, which has an asset limit of $40,000 for a single person (as of 2024). Testamentary trusts are also valuable for asset protection, protecting beneficiaries from creditors, spendthrift tendencies, or family law claims, and for tax planning around the 21-year deemed disposition rule under ITA s. 104(4). The trust allows the Trustee to plan distributions to minimize or defer capital gains tax that would otherwise arise on the 21-year anniversary.

A comprehensive Canadian Testamentary Trust Declaration must include several essential elements to be legally effective and tax-efficient. First, a clear identification of the trust type: discretionary, spousal (ITA s. 70(6)), minor child, or Henson Trust. Each type has distinct legal requirements. A spousal trust must ensure the surviving spouse receives all income during their lifetime and that no other person receives income or capital before the spouse’s death. A Henson Trust must give the Trustee absolute and unfettered discretion over all distributions.

Second, the Declaration must identify the Trustee, successor trustee, and their powers and duties. The Trustee’s powers should supplement those provided by the provincial Trustee Act and include the power to invest, sell, borrow, employ professionals, make distributions, encroach on capital, and make tax elections under the Income Tax Act. The Trustee’s fiduciary duties (loyalty, impartiality, prudent investment, and accounting) must be acknowledged.

Third, comprehensive tax provisions are critical. The Declaration should address the T3 filing obligation, the GRE designation and its 36-month limitation, the 21-year deemed disposition rule under ITA s. 104(4), the preferred beneficiary election under ITA s. 104(14), and the spousal rollover under ITA s. 70(6). The enhanced trust reporting rules (effective 2024) requiring disclosure of all trustees, beneficiaries, and persons of influence must also be addressed.

Fourth, clear beneficiary designations with contingent beneficiaries and per stirpes distribution provisions, a spendthrift clause to protect trust assets from creditors, and provisions for the termination of the trust (including the common law perpetuity period). The Declaration should also specify trustee compensation, which in Ontario follows the traditional tariff of 2.5% on capital receipts, 2.5% on capital disbursements, and two-fifths of one percent on the average annual value of assets under management. Finally, the Declaration must be incorporated into the Testator’s Will and executed with the same formalities required by the provincial Wills Act.