What happens to a TFSA after death?

The question everyone forgot to ask.

The TFSA has been around for three years already! Announced with great ceremony in 2008 and implemented the year after, the tax-free savings account (TFSA) allows thousands of Canadians to shelter up to $5,000 a year from taxes – for a total of $15,000 to date.

So far, so good. But did you ever wonder what happens to all that lovely money when the contributor dies? We know that an RRSP becomes fully taxable unless provisions were made to roll it into the surviving spouse’s RRSP. But what about the TFSA?

Not taxable, unless…

Well, relax: there won’t be any appalling claims that allow the taxman to rake in up to half of your savings, as is the case for the RRSP. Nonetheless, you should take two precautions:

  • Designate a successor holder
    The successor holder can only be your legal or common-law spouse. This person simply takes your place as the TFSA account holder, and your savings can continue to grow without being taxed. If your spouse also has a TFSA, he or she can roll the contents of yours into it without affecting his or her contribution room.

  • Designate a beneficiary
    The beneficiary is the person who inherits the contents of your TFSA, but not the account itself, which, in the absence of a successor holder, will be closed. This means that while the amount the beneficiary receives from the account is not taxable, any future income on those savings immediately becomes taxable. You may designate a beneficiary if the TFSA consists of an annuity contract from an insurance company.

Remember: the successor holder takes precedence over the beneficiary; the beneficiary takes precedence over the estate. Designating a beneficiary is recommended since in provinces other than Quebec, probate fees are incurred when amounts are payable to an estate, and these can be quite high in some provinces.

Review your arrangements regularly

In all provinces, TFSA designations can be made by filling out a form, usually provided by the financial institution. But be careful! Just like a will, a successor account holder or beneficiary designation must be kept up to date. For example, if your ex-spouse is still named as your successor account holder, neither your former nor your current spouse will be able to roll your TFSA into theirs: the first because he or she is no longer your legal or common-law spouse, and the second because he or she is not the designated successor holder.

The same attention must be paid to the designation used: the successor holder and the beneficiary do not have the same rights. The consequences if you forget or neglect these details will be less dramatic than with an RRSP, but why create problems for your heirs when you can prevent this so easily by meeting with your financial services professional (and your notary, in Quebec) and filling out the proper forms?