- Tax-Free Savings Account started in 2009, and it still has a lot of questions from the general public. One area is always being misunderstood by TFSA account holder is on passing their TFSA money to the person they wish upon their death. In the real world, there are three options for you as a tax-free savings account holder:
( 1 ) Name a successor holder who becomes the account holder. ( only your spouse or common-law partner, as defined in the Income Tax Act ( Canada ), can be a successor holder ).
( 2 ) Name a beneficiary or beneficiaries who receives the payout from the account in cash.
( 3 ) Name your estate to receive the payout in cash then distributed based on the terms of your will.
Tax Consequences of these three options:
( 1 ) The successor holder takes over the account and maintain the TFSA status. Then, the new TFSA continues to grow tax-free in the hands of the success holder and either maintain the account separately or consolidate the TFSA with their TFSA, if they so choose. No probate is needed.
( 2 ) A beneficiary or beneficiaries are deemed to receive the TFSA payout immediate after the account Holder’s death. Any subsequent capital gains, losses or income being taxable on that beneficiary or beneficiaries tax return. If you name your spouse or common-law partner as the beneficiary, they may still be able to contribute an amount equal to the value of the TFSA on your death to their TFSA if they do so by the end of the year following your death. However, this quite often is being missed due to various reasons and any capital gains or income earned on the TFSA account after your death will still be taxable in their hands. No probate is needed.
( 3 ) When TFSA paid into your estate, then TFSA proceeds will be subject to probate. This may create additional cost to your estate since some provinces will charge higher probate fee over certain the amount of estate values.
Please discuss with your professional advisors to evaluate your situation on all three different options since everyone may have
unique family structures could alter the outcome of the option you choose. This article is only for reference and should not be considered as legal advice on your tax-free savings account.