CRA comments suggest that the rule against accumulations can be problematic for lifetime benefit trusts

Under the rule against accumulations in Ontario (and other provinces), any trust income after a specified period (“surplus income”) may not be accumulated in or added to the capital of the trust and must go to the person(s) 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 meet the requirements under s. 60.011(1)(b) for being 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 would become part of the residue of the estate and be distributed in accordance with the residuary clause, so that the recipient of the surplus income would receive it by operation of law. However, using this operation-of-law approach would not solve the desire to avoid having the surplus income distributed to the Dependent Beneficiary.

CRA did not suggest any solutions to this dilemma, and stated:

[T]he mere possibility that pursuant to the terms of the trust or will, or by operation of law, a person other than the Dependent Beneficiary can receive the surplus income will cause the trust not to comply with the conditions of subsection 60.011(1). Therefore, such a trust will not qualify as an LBT from the time that the trust is created.

Neal Armstrong. Summary of 14 October 2022 External T.I. 2021-0913801E5 under s. 60.011(1)(b).