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Death of TFSA Holder

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RRSPs RRIFs and TFSAs -> Tax-free savings accounts (TFSAs) -> Death of the TFSA holder

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
bullet it is done before the end of the first calendar year following the holder's death (rollover period), and
bullet 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
bullet the time it ceases to exist (completely paid out to beneficiaries), or
bullet 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 holder.

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.

Canada Revenue Agency (CRA) resources:

bullet RC4466 Tax- Free Savings Account (TFSA) Information Sheet - see Chapter 6 Death of the TFSA Holder
bullet What happens if the account holder passes away? - Frequently asked question #13.

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.

Previous:
bulletWhat is better - TFSA or RRSP?
bulletTFSA contributions
bulletDon't over contribute!
bulletUnused contribution room
bulletTFSA investments - qualified, non-qualified, and prohibited
bulletTFSA withdrawals
bulletAsset transfer (swap) transactions
bulletTaxes payable re TFSA
bulletMarital breakdown

Back to TFSA main page.

 

Revised: December 22, 2013

 

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