Tax-free savings accounts (TFSAs) - death of the TFSA holder
A TFSA holder can name a spouse or common-law
partner as the "successor holder" in the TFSA contract. On the
death of the holder, the spouse becomes the new holder, keeping the
tax exempt status of the TFSA. This will not affect the TFSA
contribution room of the spouse.
The Income Tax Act only allows the tax exempt
status of the TFSA to be passed on to a spouse or common-law
partner. If some other person is named as a beneficiary of the
TFSA, the account will no longer be a TFSA.
Whether or not a beneficiary can be named in a TFSA contract depends on provincial legislation.
By now, most provinces have probably revised their legislation to allow for
this. Check with your financial institution.
Assets with named beneficiaries such as life insurance
policies or RRSPs are usually excluded in determining the value of an estate for
purposes of probate. It is likely that a TFSA with a named
beneficiary would also be excluded from probate. Again, this would
depend on provincial legislation. For example, the British
Columbia Law and Equity Act S. 49 provides that if, in accordance
with the terms of a registered plan (which includes a TFSA), an
annuitant designated a person to receive a benefit payable under the plan
in the event of the annuitant's death,
(a) the designation is effective if
it is in writing and signed by the annuitant, or if it is contained in a
will or other testamentary instrument,
(b) the person designated may enforce payment of the benefit, and
(c) the benefit is not part of the estate of the annuitant
Where no successor
holder is named for the TFSA, the proceeds of the account will become part
of the estate of the deceased. If a surviving spouse/common-law
partner receives proceeds from the TFSA,
the proceeds can be used to make an exempt contribution to the survivor's
TFSA, and not affect the contribution room of the survivor, as long as
it is done before the end of the first calendar
year following the holder's death (rollover period), and
it is designated as an exempt contribution in the
survivor's income tax return for the year the contribution is made.
Where there is no spouse or common-law partner
named as the successor holder, the TFSA will not lose its tax-exempt
status until the the earlier of
the time it ceases to exist (completely paid out to
end of first calendar year following
the holder's death.
Any payments to beneficiaries, including during this
exempt period, will be taxable to the beneficiaries, to the extent that the
payment includes income or capital gains earned after the death of the
Example: Holder dies with TFSA valued at
$80,000. By the time the assets are distributed to the
beneficiaries, the value has grown to $82,000. $2,000 will be
taxable income to the beneficiaries.
Tax Tip: If it is
possible (provincially regulated), designate your spouse as the successor
holder in your TFSA contract, to avoid including the TFSA in assets
subject to probate, and to avoid having to change your will.