Estate Planning Options for Your TFSA
Tax Free Savings Accounts have become a popular saving and investment vehicle for many Canadians. As of 2019, your allowable contribution room is $63,500. This can be a significant portion of your retirement savings, especially if you are a couple.
TFSAs are particularly popular with retirees because of their flexibility. Any withdrawals are not only non-taxable, they will not impact any government benefits or tax credits that are based on taxable income.
What happens to these funds when the plan holder dies? The amount in the account on the date of death is tax free – then it depends on who the funds are given to.
There are three different estate planning options for your TFSA.
1. Appoint a Successor Holder
Only a spouse or common-law partner can be a successor holder. The TFSA is transferred to your spouse directly without a waiting period and is not subject to probate fees.
The plan continues to exist on a tax-free basis and the spouse becomes the new account holder, although it will no longer have any contribution room.
If the successor holder already has their own TFSA, they then would hold two separate accounts.
If they wish, they can directly transfer the value to their own TFSA to consolidate accounts, making it easier to manage. This would be considered a “qualifying transfer” and would not affect any available contribution room.
The spouse can also cash in the TFSA with no tax consequences.
2. Designate a Beneficiary
A designated beneficiary can be a spouse, or anyone else you name. At the death of the plan holder, the beneficiary will receive the assets at the time of death tax free, and the plan will be terminated.
Any income earned after the date of death is taxable in the hands of the beneficiaries.
If the beneficiary is a spouse or common-law partner – a “qualified survivor” – he or she can transfer all or part of the TFSA (the amount at time of death) to their own account without impacting their own contribution room.
However, to be considered an “exempt contribution” the funds must be transferred within the “rollover period” which is from the date of death to December 31 of the following year.
Any growth after death is subject to tax and would require new or unused TFSA contribution room in order to be transferred.
Avoid naming a spouse together with other beneficiaries because then the spouse won’t receive survivor status.
3. Naming the Estate
You can name your estate as beneficiary and, if no successor holder or individual beneficiary is designated, the TFSA will become part of the estate and be subject to probate.
The funds will be distributed in accordance with the deceased’s will. Any income earned after death is included in the taxable income and taxes are paid by the estate.
The Bottom Line
Determining the type of beneficiary is important and can be affected by:
- The designation set up in the TFSA contract
- The provisions of the will
- Provincial legislation
When we opened our TFSAs, Alberta did not allow the successor holder designation, but most provinces have now updated their legislation to allow it. Quebec is the exception, only allowing beneficiary designation through the deceased’s will.
To save on probate fees and provide a timely, seamless transition of TFSA assets, a good strategy to consider is to designate your spouse as successor holder along with a backup beneficiary (or beneficiaries) if that’s possible in your province.