Under the rule against accumulations in Ontario (and other provinces), any trust income after a specified period (“surplus income”) may not be accumulated in the trust and must be distributed to those who would have been entitled to it had the accumulation not been directed. A trust established for a dependent mentally-infirm child (the “Dependent Beneficiary”) in such a province could address the rule by directing the surplus income to be paid to a designated beneficiary (a “designated beneficiary clause”) or stipulate that the surplus income be paid to the person(s) entitled to receive that income (an “accumulation clause”). Such a clause would cause the trust not to be a lifetime benefit trust (“LBT”) if (as might normally the case, due to the mental infirmity of the Dependent Beneficiary) someone other than the Dependent Beneficiary was named in a designated beneficiary clause or the accumulation clause was drafted to have a similar effect.
Absent such a clause, the surplus income becomes part of the residue of the estate and is distributed in accordance with the residuary clause, so that the recipient of the surplus income receives it by operation of law. Would such a distribution accord with the phrase “under which” in s. 60.011(1)(b)? CRA responded:
It is our understanding that pursuant to the rule against accumulations, surplus income has to go to the person(s) legally entitled thereto. A will may contain language directing who is legally entitled to the surplus income and depending on the terms of the will this may be a person other than the Dependent Beneficiary.
… [U]nless the Dependent Beneficiary is the person legally entitled to the surplus income a trust will not qualify as an LBT as there is the possibility that a person other than the Dependent Beneficiary can receive or obtain, during the Dependent Beneficiary’s lifetime, the use of the income of the trust. Whether the surplus income is paid to a person as a result of the operation of law as opposed to the terms of the trust or will does not alter our position.