A TFSA may be inherited by a designated beneficiary or by a successor holder. Determining the type of beneficiary you want to name to your TFSA can be part of your financial planning. If there is no designated beneficiary, the account will be directed to your estate and then distributed according to the terms of your will. Find out more.
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Why is it important to have a plan for your TFSA?
Unlike other investing accounts, like a Registered Retirement Savings Plan (RRSP), there is no time limit for how long you can keep a Tax-Free Savings Account (TFSA) open. You can continue to hold your TFSA into retirement and keep using it as a savings or investment account for as long as you wish.
This means it’s important to have a plan for what happens to your TFSA after your death. What happens to your TFSA depends on a few different factors, including the type of beneficiary named to the TFSA. If there is no beneficiary designated in the TFSA contract or your will, the property in the TFSA — any savings or investments in the account — will be directed to your estate and then distributed according to the terms of the will.
What are the two types of TFSA beneficiaries?
There are two different types of TFSA beneficiaries:
- A designated beneficiary can be a spouse or common-law partner, family member, or other person or organization named as the beneficiary of the TFSA in the TFSA contract or will of the person who holds the TFSA.
- A successor holder must be either a spouse or common-law partner of the deceased, named as the new TFSA holder in the TFSA contract or will of the person who holds the TFSA.
The important difference between these two types of beneficiaries is that the successor holder must be either the spouse or common-law partner of the original TFSA holder. The successor holder then becomes the new holder of the TFSA account. The designated beneficiary may be the spouse or common-law partner of the original TFSA holder, but does not need to be. If you do not have a spouse or common-law partner, then you can only name a designated beneficiary, not a successor holder.
How does a designated beneficiary inherit a TFSA?
The way the designated beneficiary receives the TFSA depends on whether they are a survivor of the deceased. A survivor is someone who, immediately before the TFSA holder’s death, is a spouse or common-law partner of the TFSA account holder.
A survivor may contribute all or part of their survivor payment to their own TFSA as an exempt contribution. This would not affect their own available contribution room. However, if the deceased person had overcontributed to their TFSA, it can’t qualify as an exempt contribution.
If the beneficiary isn’t a survivor — in other words, if they are not a spouse or common-law partner of the deceased, they may contribute money from the deceased person’s TFSA to their own TFSA. But only if they have contribution room available — and they may not designate it as an exempt contribution.
Learn more about TFSA designated beneficiaries.
Always keep in mind that TFSAs have annual contribution limits. If you over contribute to your TFSA during your lifetime, you can taxed on the excess amount while it remains in the account. The same is true if your TFSA has over-contributions at the time of your death. There may be tax implications for the person who inherits the TFSA. Learn more about calculating your TFSA contribution room.
How does a successor holder inherit a TFSA?
The successor holder becomes the new holder of the TFSA, which means they take ownership of the account upon the death of the deceased. This does not affect available contribution room for their own TFSA, because they would then old two separate TFSA accounts. They do not gain contribution room from the deceased holder’s TFSA.
After taking ownership of the deceased holder’s TFSA, the successor holder can make tax-free withdrawals from that account, or they can make new contributions if they have available contribution room. They may request the TFSA issuer to consolidate the accounts by directly transfer the value of one TFSA to the other. This would be considered a qualifying transfer and would not affect their available TFSA contribution room. This must be done with the TFSA issuer.
Learn more about designating a TFSA successor holder.
What are the tax implications for a TFSA beneficiary or successor holder?
To determine the tax implications, one of the main questions to answer is whether the deceased TFSA holder’s account had excess contributions. In other words, did they contribute more to the account than the contribution room they had available?
If the deceased holder’s TFSA contains an excess contribution amount at the time of their death, there may be tax implications for the account. At the beginning of the month after the date of death, the successor holder is considered to make a contribution to their TFSA that is equal to the excess amount that was in the deceased holder’s account. If that contribution amount then creates excess in the successor holder’s account, it is taxable as long as the excess remains in the account.
For designated beneficiaries, any TFSA earnings made after the date of death and before the estate is settled are considered taxable. Beneficiaries should check with the TFSA issuer. A designated beneficiary does not have to pay tax on any amount they receive from a TFSA as long as the total amount is not more than the fair market value of the property held in the TFSA on the date of death.
Quebec does not recognize the designation of successor holder for TFSAs. Learn more about beneficiary designation in Quebec.
Summary
A TFSA may be inherited by a designated beneficiary or by a successor holder. There are differences in the way a designated beneficiary or successor holder receives the account.
- A successor holder must be a spouse or common-law partner of the original TFSA holder.
- A designated beneficiary may be a spouse or common-law partner, but may also be another family member or individual the TFSA holder has designated.
- A successor holder may continue to hold their original account at the same time as receiving the deceased person’s TFSA account.
- It’s important to know whether the deceased person’s TFSA has available contribution room or is in excess of the available contribution room. This affects the tax implications of receiving the account.
