RRSPs RRIFs and TFSAs -> Tax-free savings accounts (TFSAs) -> Death of the TFSA holder
Tax-Free Savings Accounts (TFSAs) - Death of the TFSA Holder
Income Tax Act s. 146.2
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 TFSA now belongs to the spouse, and is treated the same as any other TFSA of the spouse.
Successor Holder vs Beneficiary
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 after the death of the holder, and the income from the TFSA will no longer be exempt.
Whether or not a beneficiary can be named in a TFSA contract depends on provincial or territorial legislation. By now, most provinces have probably revised their legislation to allow for this. Check with your financial institution.
Secondary beneficiaries can also be named (again, depending on your province), so that if the successor holder predeceases the holder, the TFSA can be transferred to another beneficiary or beneficiaries. This would avoid probate on the TFSA. The form for doing this with TD is form 529214 Tax-Free Savings Account Designation of Successor Holder and/or Beneficiary. This form indicates that in Quebec, the designation of a beneficiary and/or successor holder can be made only in a will or marriage contract.
Named Beneficiaries and Probate
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.
No Successor Holder or Beneficiary
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
Where there is no spouse or common-law partner named as the successor holder, a TFSA that is a trust will not lose its tax-exempt status until the earlier of
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.
When the TFSA is an annuity contract or a deposit, not a trust, the holder is deemed to have disposed of the annuity contract or deposit immediately before death, thus ending the tax-exempt status.
Canada Revenue Agency (CRA) ResourcesRC4466 - Tax-Free Savings Account (TFSA), Guide for Individuals - see Chapter 6 Death of the TFSA Holder
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.
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Revised: July 21, 2022
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