Estate Planning for TFSAs

The various rules surrounding the new TFSAs continue to evolve. Last Fall, CRA announced some anti-avoidance rules to undermine some strategies designed by taxpayers and tax professionals to “abuse” the intent of TFSAs.

Testamentary issues are the purview of provincial governments in our country. As such, each province had to respond to the “invention” of TFSAs with changes to its estate laws.

Now, a TFSA holder can designate their spouse as sole “successor account holder”. This allows the account to pass on death tax-free directly to the survivor’s TFSA and not incur probate fees. The tax-free status of the deceased’s TFSA wealth continues in the spouse’s TFSA.

This is in contrast to designating a beneficiary. Upon death, the TFSA will be de-registered and the assets will transfer free of tax to the beneficiary. The only way to do a direct transfer is with a spouse, but even then there are some special rules to be aware of. The transfer to the beneficiary’s TFSA must be made before the end of the calendar year following the year of your death. Also, the transfer cannot exceed the fair market value of the TFSA at death. So any excess accumulation between death and the actual transfer value of the TFSA will be taxable! Therefore it is highly recommended to to name a successor rather than a beneficiary.

If someone else is also named as beneficiary on the TFSA account, then the “successor account holder rules” do not apply…. read on!

In the absence of this designation on the TFSA account, upon death the TFSA will pass into the Estate. As such, probate fees will incur, and the beneficiary of the account will be determined by the will. If the surviving spouse is either specifically named to receive the TFSA, or is the only beneficiary of the entire estate, then the spouse is considered to be the “survivor”. In trust law, a TFSA account can continue until the end of the year following the year of death (the “exempt period”). However, income earned after death in the exempt period and paid to beneficiaries will be taxable to them. But, if a survivor spouse is a recipient, then said payments may be contributed to their own TFSA within that same period as a special contribution over and above their regular TFSA contribution room (this is called an “exempt contribution”).

If you were an “early adopter” and opened your TFSA account early last year, you should ascertain the designations you made, if any, on that application and review that in light of these new developments in estate planning.

Updated September 2015