The Income Tax Act only allows the tax exempt
status of the TFSA to be passed on to a spouse or common-law partner
who is a successor holder, which differs from a beneficiary. 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 Wills, Estates and Succession Act s. 95 provides that:
A benefit payable to a designated beneficiary or to a trustee appointed under section 92 under a benefit plan on the death of a participant does not form part of the participant's estate and is not subject to the claims of the participant's creditors.
S. 1 of the same Act provides that RRSPs and TFSAs,
among other things, are benefit plans for purposes of the Act.
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
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.
Canada Revenue Agency (CRA) resources: