TFSAs at death involve several designation options and choosing the right one can be critical

A Tax Free Savings Account allows you to shelter money from taxes. What happens to the money at death is up to you.  Following are four scenarios dealing with TFSAs at death.

Successor Holder Designation

Successor Holder Designation is by far the simplest and most seamless choice for TFSAs at death. When a TFSA holder dies their spouse or common law partner becomes the new holder and the tax-exempt status of the TFSA is maintained. All of this is done without affecting the contribution room of the surviving spouse in their own TFSA.

The Successor Holder can maintain two separate TFSA accounts afterwards or can consolidate the deceased spouse or common-law partner’s TFSA with their own. Managing one account is easier than managing two accounts.

Naming your spouse or common-law partner as Successor Holder will mean that probate fees on the money in the TFSA will be avoided since it will pass outside your estate and directly to your spouse or common-law partner as TFSA monies.

We suggest you designate your spouse as a Successor Holder and choose someone else as a beneficiary (see non-spousal beneficiary below) in the event that you and your spouse die together. Also, it's common for one spouse to name the other spouse as Successor Holder and vice versa. 

Spousal Beneficiary Designation

There are some rare circumstances where designating a spouse or common law partner as beneficiary instead of Successor Holder can be advantageous - it's usually associated with particular types of investments.

When choosing this designation the TFSA account will not be part of the estate and will stay tax exempt, however, the transfer requires that some paperwork is done in a timely manner.

A spouse or common-law partner can transfer assets from their deceased spouse’s TFSA to their own TFSA, as long as this occurs during the ‘rollover period’. This period begins the day of death and ends on December 31st of the following year. Transfers during this rollover period may be deemed to be ‘exempt contributions’ and as such do not affect the spouse or common-law partner’s  TFSA contribution room.

Exempt contributions cannot exceed the fair market value of the deceased’s TFSA at the date of death; therefore, any TFSA growth after the date of death will be taxable. Because of this taxation, it is best to make the transfer as quickly as possible.

To declare an exempt contribution, you will need to send the CRA (Canada Revenue Agency) form RC240, Designation of an Exempt Contribution Tax-free Savings Account (TFSA) within 30 days of the contribution to ensure that the contribution from your deceased spouse’s TFSA does not affect your own TFSA contribution room.

Non Spousal Beneficiary Designation

Your beneficiary will inherit, tax free, the value of your TFSA on the day of your death. Income accruing after the date of death, including capital gains or losses, becomes taxable income to the beneficiary.

No Designation for TFSAs at death

Where the TFSA contract does not name a Successor Holder or Beneficiary, the property in the TFSA is an asset of the estate and is distributed in accordance with the terms of the deceased’s will. Income and accrued capital gains in the TFSA to the date of death are exempt from income tax.

Income accruing after the date of death, including capital gains or losses, is included in the taxable income of the estate and subject to income tax either in the estate return or the hands of the beneficiaries.

If you are unsure what designation you chose for TFSAs at death when applying to set up your TFSA, check with your financial planner or the institution that holds your TFSA. You can change the designation to suit how you wish this account is dealt with at death.