TFSA Contribution Room, Gone After Death

Tax Free Savings Accounts (TFSAs) are one of the most valuable investing vehicles available to Canadians. The ability to grow income and capital tax free delivers substantially higher returns compared to a taxable account. Therefore, it’s important to ensure that all your (and your spouses) contribution room is used. The current annual limit is $5,500 annually, indexed to inflation and rounded to the nearest $500 increment.

With that in mind, we’d like to take this time to discuss a potentially important estate planning manner. After death, TFSA’s can no longer be contributed to, so any unused contribution room is permanently lost. So if a spouse is near-death, it is wise to take the time to ensure their contribution room has been fully used. Missing out on this can be very costly from a long term wealth management perspective. This differs from RRSPs, which allow an individual to contribute to their deceased spouse’s RRSP up to the end of the following February, which is the normal deadline for RRSPs contributions.

Keep in mind that a TFSA’s contribution room may be more than the $5,500 standard per year amount. If you had withdrawn any amount in a previous year, this is added to the following years contribution room. For example, if I had withdrawn $10,000 from my TFSA, and withdrew it to buy a car, the following year I would have $15,500 of contribution room (the $10k I withdrew, plus the $5.5k room for the new year).

After death, what happens to the TFSA is matter of beneficiary designations. The differences are:

  • Successor Beneficiary -> Spouse assumes full control of TFSA and it is rolled into their own TFSA, no tax implications (assuming the election is made 30 days after the transfer using form RC240, AND there is no excess TFSA contributions)
  • Regular Beneficiary -> TFSA is closed and the amount is payable to the beneficiary. Note that any income gained in the TFSA after death is taxable to the beneficiary, but the amount up to death is tax free
  • No Designation -> TFSA becomes part of the estate and is subject to probate and the conditions of the individuals will

While the death of a spouse is an extremely difficult time for everyone involved, a little bit of extra tax planning can make a large difference to your families long term wealth.

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