Estate Planning With Your TFSA – Tax-Free Savings Account – Naming A Beneficiary Or Successor Holder

by Mike Holman

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One of the important aspects of the tax-free savings account (TFSA) is estate planning.  Much has been written about TFSA contribution and withdrawal rules, but with the TFSA, you have the ability to decide who gets the money in the account if you die.

If you have a TFSA, take a few minutes to figure out the estate planning rules (they are not difficult) and make sure your tax-free savings accounts are set up properly.  If you do this, the TFSA can be passed to a spouse or common-law partner with little or no tax implications.  My wife and I set up our TFSAs a couple of years ago and to be honest, I have no idea if we have this set up or not.  It’s on the “to do” list!

The successor holder and beneficiary are provincially legislated.  The provinces and territories came up with their legislation at different times after the tax-free savings account was started.  If you were an early TFSAer, it’s very possible that your financial institution didn’t have the successor holder or beneficiary information on the account setup form.

Tip – To pass the TFSA to a spouse or common-law partner, designate them the Successor Holder.  Anyone else – designate them a beneficiary.

If you wish to give your TFSA (tax-free savings account) money to a designated person upon your death, this can be done using one of two options available through the TFSA. Note that these options are not available to Quebec residents.

1) TFSA Successor holder

You can only designate a spouse or common-law partner as the successor holder.  If you die, ownership of the tax-free savings account will be transferred to the survivor. The survivor gets to keep the tax-free status of the TFSA money without affecting their existing contribution room.

Advantages to naming a successor holder:

  1. No probate fees
  2. No tax issues since money is never de-registered.
  3. Money will remain in a TFSA.

2) TFSA Beneficiary

A beneficiary can be any person. If you die, the money will be transferred to the beneficiary. If the beneficiary is not a spouse or common-law partner, the money will be de-registered as of the date of death of the original owner and will not remain tax-sheltered. The money will be transferred to a non-registered account in the name of the beneficiary. Any future capital gains will be calculated using the value of the investments as of the date of death of the original owner.

If the beneficiary is a spouse or common-law partner, they are allowed to make an exempt contribution to their own TFSA. The contribution cannot exceed the market value of the TFSA on the date of the original owner’s death. If this applies, the survivor gets to keep the tax-free status of the TFSA money without affecting their existing contribution room. You have to notify the CRA if you are making an exempt contribution as a survivor within 30 days of the transfer.  This can be done using Form RC240, Designation of an Exempt Contribution Tax-Free Savings Account (TFSA).

Advantages to naming a beneficiary:

  • No probate fees.
  • Minimal tax issues if beneficiary is a survivor.
  • Money will remain in a TFSA is the beneficiary is a survivor.

Tip – Name a beneficiary, even if you have already named a successor holder.  If you and the successor holder die at the same time, the beneficiary will get the money.

If you live in a Quebec, these options don’t exist. The TFSA can only be passed through the estate.

Note that if you name both a successor holder and beneficiary on a TFSA, the successor holder will override the beneficiary.

These designations are account specific. You can name different successor holders or beneficiaries to each account. It is up to you to ensure that the correct estate information is assigned to each account.

You can designate a beneficiary or successor holder when you set up your TFSA or any time later on. The designations can be changed at any time.  Just contact your financial institution or advisor to verify or change your TFSA designations.

Definition: Survivor – a survivor is an individual who is, immediately before the TFSA holder’s death, a spouse or common-law partner of the holder.

What happens to the TFSA if I don’t name a successor holder or beneficiary?

If you don’t specify a successor or beneficiary on the tax-free savings account, the money will become part of your estate. Your estate will be handled according to your will or applicable laws.  The money in the TFSA can still be willed to a spouse or common-law partner, but probate fees will be applied and the money will no longer be tax-sheltered.

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{ 15 comments… read them below or add one }

1 Money Smarts Blog

Update – My wife phoned ING, and we do not have any successor holder or beneficiary named on our accounts. This will be fixed soon!

2 Juan

After I read the article, I cannot understand the difference between the 2 if One wants to nominate a spouse.

Can you advise?

3 Money Smarts Blog

@Juan – The difference is that the successor holder can take over the account automatically as of the date of death and the money remains tax-sheltered in the TFSA.

If the beneficiary is a spouse, they transfer the TFSA money to their own TFSA, however they will have to fill in a form to notify the CRA. Any increase in the value of the TFSA from the date of death will not be considered a qualified transfer, but instead a contribution, if it is moved to the beneficiarie’s TFSA.

4 Echo

With my TFSA I am buying dividend growth stocks (surprise). Since I have a defined benefit pension to live on in retirement, I plan on building up my TFSA portfolio and just withdrawing dividends for any extra income that I need in retirement (new car, big vacation, etc.) I don’t plan on touching the capital ever.

I would love to leave this portfolio to my kids, intact so it keeps spinning out dividends. So, if I were to name my daughter as the beneficiary, my TFSA would be dissolved upon my death and she would then hold the portfolio in a non-registered account under her name. She would then pay taxes on any future capital gains, but if she never touched the capital and just collected the dividends she could avoid paying any capital gains, right?

Am I missing anything here?

5 Money Smarts Blog

@Robb – That is correct.

Very good point that the TFSA is a good estate-planning tool, since there are no capital gains to be paid.

6 Doctor Stock

Hey, thanks so much for this info. I wonder how many people selling the product would be able to share the same info?

7 caroline

how does it work if the successor holder/beneficiary is a minor upon my death?
I thought a minor couldn’t own a TFSA…

8 Mike Holman

Caroline – The successor holder has to be a spouse. A minor (I’m assuming a child) would have to be named as a beneficiary.

In that case, they would still get the money without probate fees, but it would be in an unregistered account.

9 Juan

If I name my spouse as the succesor holder, do I need to name some beneficiaries in case we both die at the same time?

10 Mike Holman

@Juan – Excellent point. Yes, that is a good idea.

I’ve updated the post to mention that.

11 Bob Meakin

What is required to close the TFSA of a deceased who has named a minor as beneficiary to the account? I am the executor and the bank is saying I need to have the parents named as guardians of the beneficiary. I have phoned the Justice of Manitoba and they are saying it is a federal issue due to the nature of the account. Any suggestions would be appreciated.

12 Moira Lipscombe

I am in the process of designating my daughter as a beneficiary and have been told (by ING) that when I die my will takes precedence over this designation. My will says everything to be shared between my two children, however, my daughter lives much closer to me and will be the one settling my accounts. I wish to avoid paying probate fees on my TFSA and at the same time give her some instant funds to settle things. ING tells me that regardless of this designation the funds will be shared between both children according to the will and not according to the designation. Is this true ? I live in B.C.

13 Moira Lipscombe

I have just received a phone call from the ING accounting and taxation department telling me that I was unfortunately advised incorrectly by their associate and the beneficiary designation does take precedence over the will and not the other way around.
Thank you

14 Ruth Ryan

i have a tfsa beneficiaries are my children. what is meant by dividends from these accounts?

15 John Pass

Can I name a number of children as beneficiaries on each TFSA acct. or is only one beneficiary permitted per acct.?

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