Your TFSA is a great way to accumulate tax-free income, but what happens when the account holder dies?
A TFSA account holder should designate someone either as (i) a successor holder, or (ii) a beneficiary, so the assets in the TFSA can flow directly to such person. If someone has not been designated, then the assets in the TFSA would flow through the estate, and could result in probate fees.
The designation of either (i) a successor holder or (ii) a beneficiary, should be made in the will or TFSA contract.
A successor holder can only be a spouse or a common-law partner. Upon death of the account holder, the successor holder becomes the new holder of the account – so the successor holder becomes the owner of two separate accounts – his/her own, and the account of the deceased. The successor holder has the ability to withdraw funds from both accounts on a tax free basis. The successor’s own contribution room is unaffected by the inheritance of the deceased’s TFSA account. While the TFSA account of the deceased can continue growing tax-free, the TFSA contribution room of the deceased is lost upon death – the successor holder cannot make a contribution to the TFSA account of the deceased.
When a TFSA account holder designates a beneficiary, who is a spouse or common-law partner, the TFSA account of the deceased ceases to exist upon death of the TFSA-holder, but the spouse or partner may contribute any amounts from the deceased’s TFSA to their own by December 31 of the year following the year of death. However, all income earned on the TFSA assets and any increase in fair market value after death will be taxed as ordinary income to the beneficiary. If a beneficiary is designated who is not a spouse or common-law partner, can only contribute amounts from the deceased’s TFSA to their own if they have sufficient contribution room. If the beneficiary of the TFSA was the “estate”, the TFSA would be paid into the deceased’s estate, and probate fees would be payable. Any growth in the value of the TFSA after death would be taxable to the estate.
Therefore, it is preferable to designate a spouse or partner as a successor holder, rather than as a beneficiary.
This article is a general discussion of certain tax and accounting matters and should not be relied upon as tax or accounting advice. If you require tax or accounting advice, we would be pleased to discuss the issues in this article with you.
