What Happens To Your TFSA When You Die?

Know What You Should Do With Your TFSA Before You Die

You can’t take your money with you when you die. So here’s why knowing about a special type of beneficiary – called a successor holder – can make it easier for you to pass on your TFSA.

If you’re like most people, you like to be in control.

You want to be in charge of your career, of your money, of your life in general. But life tends to break out in uncontrollable ways.

There is some good news, though: While you can’t prevent many of life’s surprises, you can prepare for them.

Take that far-off (you hope) day when your life comes to its end.

If you’ve worked hard, saved, and spent wisely, chances are there will be some money left over after you’re gone.

It could be in your

bank account,
registered retirement savings plan (RRSP),
registered retirement income fund (RRIF), or
tax-free savings account (TFSA).

TFSA Beneficiary When You Die

So who gets it? And what are the tax implications?

That depends on how you set up your accounts.

What’s a beneficiary?

Typically, the person you choose to get your money after your death is the beneficiary.

That means the person who gets the benefit. You name a beneficiary for your life insurance policy, for instance, and in your will.

You can also name beneficiaries for registered accounts like your RRSP, RRIF or TFSA.

Successor Holder

People often make their spouses or common-law partners their beneficiaries. But with your TFSA, there’s another way to pass on your money to your spouse or partner.

You can name a successor holder.

What Is A Successor Holder?

While you’re alive, you don’t have to pay tax on the money in your TFSA.

Either while it’s in there growing for you, or when you take it out. But after you die, the tax situation changes. And that’s why the way you designate your spouse or partner makes a difference.

What happens if you make your spouse or partner your successor holder?

If named your successor holder, your spouse or common-law partner (partner) can take over your TFSA after you die.

It doesn’t matter if your spouse or partner has already put the maximum allowed into his or her TFSA and there’s no contribution room left.

The money in your TFSA won’t affect your spouse or partner’s TFSA contribution room.

However, when you are deceased, any used TFSA contribution room you may have had does not carry over to the successor holder.

As a successor holder, your spouse or partner becomes the new owner of your TFSA.

The same tax rules apply as when you were alive.

Your TFSA isn’t treated as part of your estate.

It goes directly to your spouse or partner, so there won’t be any probate fees to pay.

Your spouse or partner can keep your TFSA separate.

Or they can move the funds that were within your TFSA into their own TFSA. It’s a simple solution.

TFSA Beneficiary vs. Successor Holder

Here’s something important to note.

Often it’s a good idea to make your spouse or partner your TFSA successor holder. But it isn’t always the best move.

You can have many different kinds of investments in your TFSA.

With some, you may be better off with a beneficiary and not a successor holder.

Those that come with guaranteed death benefits is one example.

To best understand how this could work, speak with your advisor.

Swimming Through Red Tape When You Die

What happens if you make your spouse your beneficiary?

You can make your spouse or partner your beneficiary and not your successor holder on your TFSA anywhere in Canada, except in Quebec.

In Quebec, residents can make a spouse or partner a beneficiary only if the TFSA is a life insurance product.

An example is a segregated fund contract.

Here’s how it works:

Your spouse or partner can still put your TFSA money into his or her own TFSA without using up their own TFSA contribution room. But for that to happen, there are deadlines to meet and there is paperwork to fill out.

Your spouse or partner has to file an RC240 form with the Canada Revenue Agency (CRA).

That way the government knows the money is coming from your TFSA and is what’s called an “exempt contribution.”

As such, it shouldn’t be taxed.

Your spouse or partner has until December 31 of the year after the year you die to transfer the money.

This is variously called the “exempt period” or the “rollover period.” And your spouse or partner has 30 days after the transfer to file the RC240.

Note that in Quebec, it’s still possible for a spouse to make an exempt contribution. That’s true even if it’s from a non-insurance TFSA.

There’s a lot to consider in the weeks and months after a spouse or partner dies.

It can be a challenge to keep up with all the necessary red tape.

Your spouse or partner could meet the transfer deadline but miss the RC240 filing deadline.

In that case, the money will still roll over into their TFSA. But that’s only if they have sufficient contribution room to cover the transferred amount.

The current (2020) annual TFSA contribution limit is $6,000.

Someone opening a TFSA for the first time this year can put in that $6,000 plus the maximum for every year that person was eligible.

That could be as far back as when TFSAs began in 2009.

Adding up the limit for each year since then, the most you can potentially put in a TFSA in 2020 is $69,500.

However, what if both you and your partner were saving the TFSA maximum each year?

Also, what if you have seen decent investment growth?

Your TFSA could be worth six figures and your spouse or partner could have little or no contribution room. What then?

Then the government will charge a penalty of 1% per month for anything above the contribution limit.

So let’s say your TFSA is worth $100,000 and your spouse or partner has no contribution room.

What happens then?

That means you’ll pay a $1,000-a-month penalty until your spouse or partner takes out the excess money.

And what if the investments within your TFSA continue to grow and earn income between the time of your death and the contribution to your beneficiary?

Then your beneficiary will have to pay taxes for that investment income. (This can happen even if the contribution was considered a properly executed exempt contribution.)

No TFSA Beneficiary When You Die

What if you don’t name a successor holder OR a beneficiary?

With neither a successor holder nor a beneficiary, a distribution from your TFSA becomes part of your estate.

As such, it becomes subject to probate fees and potential delays.

Your estate may ultimately receive the net proceeds of your TFSA.

However, any investment growth between the dates of your death and the transfer of all TFSA proceeds to your estate will be taxable.

Note that the CRA indicates that as a “survivor”, your spouse or partner may still be able to designate a survivor payment as an exemplary contribution to their own TFSA, even if he/she was not designated as a beneficiary.

What happens to funds added to a TFSA after your death?

You won’t be around to contribute.

Money could be transferred automatically into your TFSA.

If that happens, your family or executor might not have the chance to notify your bank before the penalty-free withdrawal date.

Then the money may be counted towards your successor holder’s or your beneficiary’s contribution limit (whichever you had chosen to designate as a transferee).

TFSA Successor Dies Before You

What happens if your spouse or partner dies before you do?

A contingent beneficiary is a backup beneficiary who gets the money if your beneficiary dies before you do.

Perhaps you’ve named a contingent beneficiary for your life insurance policy and RRSP and in your will. But because your TFSA successor holder has to be your spouse or partner, there can’t be a contingent successor holder for your TFSA.

So you name someone else – a child or a sibling – as the backup beneficiary in case the successor holder dies first.

If you have no spouse or partner when you open your TFSA, you can just name a beneficiary. (And if you marry, later on, you can make your new spouse your successor holder.)

If you name your children or siblings the beneficiaries on your TFSA, they are “non-spousal or common-law beneficiaries.” Filing an RC240 form isn’t an option for them.

If they have contribution room, your beneficiaries can transfer the money to their own TFSAs.

They can transfer all, some, or none of your TFSA to their own accounts.

The CRA will treat whatever TFSA funds the beneficiaries do not receive as assets inside a taxable trust.

Any investment growth in your TFSA up to the day you die isn’t taxed.

Your beneficiaries, however, will have to pay tax on any received investment growth in your TFSA after your death.

If funds remain in the TFSA at the end of the exempt/rollover period, the TFSA itself will be taxed as a trust in the investment growth.

More Than One TFSA Beneficiary

Can you name more than one beneficiary for a TFSA?

Suppose you have no spouse or partner, but several children.

There’s no limit to the number of beneficiaries, so long as the percentage, each gets of your TFSA adds up to 100%.

Receiving a piece of your TFSA could mean your beneficiaries collectively have enough contribution room in their TFSAs for the money you leave them.

What if you name a minor as a beneficiary?

A jurisdiction’s laws may require that the TFSA proceeds be paid to a parent, guardian, or other specific third parties.

It could be beneficial to name a trustee on the beneficiary designation form to hold funds in trust until the age of majority for any minor beneficiary.

TFSA Tax Implications

As investments go, a TFSA can be quite straightforward. But as we’ve seen, the tax situation once you’re gone can get complicated.

That’s why it’s important to think ahead when you’re setting up your TFSA.

Making the right choice can minimize the hassle and tax burden for your spouse or partner.

You may decide to leave your TFSA to your children or siblings.

If you do, give them a heads-up to let them know what kind of tax situation to expect.

The bottom line?

To best understand your options and choose the one that’s right for you, speak with your advisor.

Discussion: Have you named a beneficiary or successor for your TFSA when you die?

Leave me your comments below and I’ll make sure to respond.

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