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:
- No probate fees
- No tax issues since money is never de-registered.
- 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.