Jennifer's will creates a testamentary trust for her son, Alex, who has a severe disability and is eligible for the Disability Tax Credit. The trust is intended to provide for Alex's ongoing care. What is a key tax feature of this specific type of testamentary trust for Alex?

Question: Jennifer's will creates a testamentary trust for her son, Alex, who has a severe disability and is eligible for the Disability Tax Credit. The trust is intended to provide for Alex's ongoing care. What is a key tax feature of this specific type of testamentary trust for Alex?

Answer options: ✅ It can be designated as a Qualified Disability Trust (QDT) and taxed at graduated personal rates.

• All income generated by the trust must be immediately allocated to Alex and taxed in his hands.
• The trust income is exempt from all taxes due to Alex's disability.
• The trust is subject to a flat tax rate of 25% on all accumulated income.

Correct answer: It can be designated as a Qualified Disability Trust (QDT) and taxed at graduated personal rates.

Explanation: If Alex is eligible for the Disability Tax Credit and meets other specific criteria, the testamentary trust can be designated as a Qualified Disability Trust (QDT). This allows the QDT to maintain the benefit of being taxed at graduated personal tax rates, significantly reducing the tax burden on accumulated income (Income Tax Act, s. 122(1.1)).