There are two types of special trusts recognised for tax purposes in the Income Tax Act.
The first type of Trust is referred to as a Special Type A Trust. This is a Trust created for the benefit of a person or persons with a disability as defined in Section 6B(1) of the Income Tax Act. “Disability” is defined as a moderate to severe limitation of any person’s ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment, if the limitation has lasted or will last for more than a year and is diagnosed by a registered medical practitioner.
A Special Type A Trust may be created for more than one disabled person as long as all persons for whose benefit the Trust is created are relatives in relation to each other and fall within the definition of being “disabled”. Note that it is not a requirement that the beneficiaries are related to the Founder or Settlor of the Trust.
The second type of Trust is referred to as a Special Type B Trust. This is a Testamentary Trust created in a Will and which only comes into existence upon the death of the Testator. To qualify as a Special Type B Trust, the Trust may only be for the benefit of persons who are descendants of the deceased and who are alive on the date of the testator’s death (including those conceived, but not yet born) and where the youngest beneficiaries are under 18 years of age on the last day of the year of assessment in question. This means that it is critically important to ascertain on the last day of each year of assessment that the youngest beneficiary is still under 18 years of age, since, on the day the youngest beneficiary turns 18, the Trust immediately loses its status as a Special Type B Trust and along with all the tax benefits that go with that status.
Special Trusts are taxed at the same sliding scale (from 18% to 41%) as natural persons and also enjoy the same capital gains tax inclusion rates as natural persons.