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By Canada Life | Jan. 25, 2023
John Yanchus, CPA, CA, TEP, Director, Tax and Estate Planning

It’s important to help your clients understand how different tax implications can affect their estate planning. In the event of their death, these decisions can have significant impacts on their tax-free savings account (TFSA). 

How is a TFSA taxed at death? 

No amount is included in the income of the TFSA holder at death. 

A spouse or common-law partner1 who receives the proceeds of a TFSA upon death of the holder can continue to hold the funds in the TFSA without this affecting their own TFSA contribution room. Some refer to this as a super-sized TFSA. The outcome can be achieved through various methods, depending on whether the spouse: 

  1. Is designated as the successor holder.  
    • The successor holder must be a spouse as defined by the Income Tax Act, of the deceased’s TFSA. 
    • When the spouse is named as the successor holder under the TFSA, the account – plus any income earned after the death of the original holder – will simply continue as a TFSA with all the rights of ownership passing to the spouse, including the ability to name or change beneficiaries.  
    • This TFSA will be in addition to their entitlement of their own TFSA. Any unused contribution room of the deceased’s TFSA can’t be used and expires upon death.  
    • If there’s no successor holder named, the proceeds of the TFSA will be paid out to the beneficiaries under the TFSA. 
  2. Receives the proceeds of the TFSA as a beneficiary (either as a designated beneficiary of the TFSA or a beneficiary under the deceased’s will). 
    • This is a spouse who’s not named as the successor holder of the TFSA but receives the proceeds as a named beneficiary of the TFSA. They may be able to contribute the proceeds they receive to their own TFSA as an exempt contribution (up to the fair market value (FMV) of the plan at the date of death).  
    • An exempt contribution has no impact on the spouse’s own TFSA contribution room.  
    • A spouse can also be eligible to make an exempt contribution. They must be either the sole beneficiary of the holder’s estate or entitled to the amounts paid under the TFSA under the deceased holder’s will. 

Exempt contribution 

To qualify as an exempt contribution, all of these conditions must be met: 

  • The contribution to the surviving spouse’s TFSA must be made on or before Dec. 31 of the year following the year of death of the holder. 
  • The amount designated as an exempt contribution can’t exceed the FMV of the TFSA at the date of the holder's death. 
  • The contribution must be designated as an exempt contribution by filing form RC240, Designating an Exempt Contribution to a Survivor Tax-Free Savings Account (TFSA), with the Canada Revenue Agency (CRA). 
  • The spouse must file the RC240 form must be filed by the spouse with the CRA within 30 days after the day the contribution is made to their TFSA. 

These requirements only apply to a spouse. There are no provisions to allow an exempt contribution for any other beneficiary. Any beneficiary other than a spouse must have available TFSA contribution room to contribute all or part of the proceeds received into their own TFSA. 

If there are no named beneficiaries, the proceeds will be paid to the deceased holder’s estate, may be subject to probate fees and will be distributed according to their will. Any growth in value of the TFSA after the date of death will be taxable to the beneficiary or the estate. 

Do you have clients in Quebec?  

In Quebec, unless your client’s TFSA is also an insurance policy, such as a segregated fund or a guaranteed investment option (GIO), they can’t designate beneficiaries or successor holders under the TFSA contract. Rather, a spouse can only be designated as the beneficiary of a TFSA in the deceased’s testamentary dispositions. In that case, the spouse will be able to deposit the amounts into their own TFSA without it affecting their contribution room. However, two conditions must be met: 

  1. Payment of the amounts must be made no later than Dec. 31 of the year following the year of death of the holder. 
  2. Within 30 days following the contribution to the surviving spouse’s TFSA, the spouse must file form RC240 Designating an Exempt Contribution to a Survivor Tax-Free Savings Account (TFSA) with the CRA. 

Example   

Bill owned a TFSA that had an FMV of $30,000 at the time of his death in April 2022. Bill had not named a successor holder or beneficiary under his TFSA. The TFSA was closed six months after Bill’s death. At that time the plan grew to $32,000. Bill’s wife Mary is the sole beneficiary of the estate and receives the proceeds of the TFSA through the estate. 

Since Mary was Bill’s spouse at the time of his death, she's entitled to make an exempt contribution to her own TFSA of up to $30,000, provided she does this by Dec. 31, 2022. She must file form RC240 with the CRA within 30 days of making the contribution to designate it as an exempt contribution. Mary must have available TFSA contribution room if she also wants to contribute the additional $2,000 that was earned in the TFSA after Bill’s death. 

Please note: while the FMV of the TFSA at the time of Bill’s death ($30,000) will not be taxed, the $2,000 growth in value of the TFSA after Bill’s death is taxable to Mary because she was not designated as a successor holder.  

Planning opportunities 

Beneficiary designations 

It’s important to help your clients have a plan before they die. Using beneficiary designations can prevent the assets from being included in the estate and being governed by the will. Estate planning and probate planning can be accomplished together using beneficiary designations from registered accounts and insurance products. Generally, naming a beneficiary (other than the estate) ensures that, except in limited cases, that the death benefit passes outside of the estate and it's not be subject to probate. Be aware that beneficiary designations are only one planning component of overall estate and probate planning. 

There may also be situations where benefits are lost if a designation is not made or if the timing of certain options isn't considered, as there are time restrictions in place for various transfers and benefits. 

Clients should review their existing TFSA beneficiary designations after life events or other changes to ensure either a beneficiary designation or successor holder designation is up-to-date and, where appropriate, and in accordance with their estate planning objectives.  

Summary 

Upon death, the TFSA is fairly straightforward, as it doesn’t cause a tax obligation to arise. Planning options are available to the TFSA holder during their life. It’s important to help your clients determine how to leave their TFSA to their beneficiaries.  

Do your clients have an RRSP or a RRIF? Refer to these articles on how to incorporate similar planning for other registered plans:  

Throughout this article, the word spouse, will include a common-law partner as defined by subsection 248(1) of the Income Tax Act (Canada) for income tax purposes.

This material is for information purposes only and should not be construed as providing legal or tax advice. Reasonable efforts have been made to ensure its accuracy, but errors and omissions are possible. All comments related to taxation are general in nature and are based on current Canadian tax legislation and interpretations for Canadian residents, which is subject to change. For individual circumstances, consult with your legal or tax professional. This information is provided by The Canada Life Assurance Company and is current as of January 2023.

Canada Life and design, and Canada Life Investment Management and design are trademarks of The Canada Life Assurance Company.