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Designating a Beneficiary

Just as with registered accounts, you can name a beneficiary to receive the assets held in your TFSA upon your death.  This feature of TFSA is a very useful estate planning tool and you should take advantage of this feature, and in doing so, ensure that your TFSA beneficiary designation is complimentary and supportive of your over all estate plan.

 

The designation of a beneficiary can be made in any of the following ways:

  • You can designate a specific individual as the beneficiary in the TFSA account’s documentation.
  • You can name your estate as the TFSA beneficiary in the account’s documents and then name the beneficiaries within your will.
  • You can leave the designation of a beneficiary blank in the TFSA documents causing the beneficiary designation to automatically default to your estate.
  • You can leave the TFSA account’s designation of a beneficiary blank, die without a will, and let the provincial or territorial succession legislation determine the TFSA beneficiaries.

Now, when it comes to actually designating a beneficiary for your TFSA, things can get a little complicated. While you can name anyone as a beneficiary, when it comes to naming a surviving spouse/common-law partner, the Canada Revenue Agency (CRA) provides special designation for them as either a Beneficiary or as a Successor Holder, and the CRA has their own specific TFSA definitions of a beneficiary, as outlined below.

In effect, there are two different types of TFSA beneficiaries:

  • a Survivor (a surviving spouse or common-law partner) who has been designated as a Successor Holder
  • a Designated Beneficiary (which could include your children or grand-children, a former spouse or common-law partner, a Survivor who is not a Successor Holder, your Estate, or a Qualified Donee)

TFSA definitions of a beneficiary

For TFSA accounts, the CRA makes reference to certain entities with TFSA specific definitions. It is important to understand the definitions in order to fully understand your options when contemplating a beneficiary designation:

  • The first definition is that of Survivor. When the CRA and your financial institution refer to the Survivor, they do so with the following definition in mind: “The Survivor is your spouse or common-law partner at the time of your death.”
  • The second TFSA-specific definition is Successor Holder. A Successor Holder is a type of beneficiary designation that can only be made provided that the provincial and territorial laws permit this type of designation.  According to the CRA, “a Successor Holder is defined as a surviving spouse or common-law partner that is designated to receive all of the property of a deceased’s TFSA account and they receive all of the deceased’s TFSA account holder’s rights.”
  • The third definition is Qualified Donee. Under the Canada Income Tax Act a Qualified Donee is any entity that is permitted to issue official income tax receipts for donations that they receive. A few examples of Qualified Donees would be registered charities, registered Canadian amateur athletic associations, Canadian municipalities, etc.

Designating a Survivor as the Successor Holder

In those provinces or territories that permit TFSA beneficiary designations, you can appoint your surviving spouse or common-law partner as either a designated beneficiary or a Successor Holder.

 

 

If you designate a Survivor (your surviving spouse or common-law partner) as the Successor Holder of your TFSA account,

  • The deceased does not include the value of their TFSA account, contributions nor earnings, in their date of death income tax return.
  • The successor holder will become the new holder of the TFSA immediately upon your death and the financial institution administering your TFSA will handle all of the required documentation and CRA filings.
  • The successor holder will receive your TFSA assets and all earned income, up to the date of death, sheltered within a TFSA account.
  • All of the earned income after the date of your death will remain sheltered within the TFSA. The assets and income remain sheltered from income tax within a TFSA.
  • After taking over ownership of the deceased’s TFSA, the successor holder can transfer all or a portion of your TFSA account into their own existing TFSA account, without impacting their TFSA contribution room.
  • After taking over ownership of the deceased’s TFSA, the successor holder can make tax-free withdrawals and make new contributions subject to their own unused TFSA contribution room limits.

In certain instances where the Successor Holder is non-resident of Canada, they can still take ownership of the TFSA provided they have a valid social insurance number (SIN). If the Successor Holder is not a resident of Canada, they should request an individual tax number from the CRA.

If at the time of death, the TFSA held contributions that were in excess of the deceased’s allowable limit, a penalty tax of 1.0%, per month, is payable for each month up to the month of death.

The deceased’s executor is required to complete and file an RC243, Tax-free Savings Account (TFSA) Return 20, and form RC243-SCH-A, Schedule A –Excess TFSA Amounts, for the applicable period.

In addition, the CRA “deems” the Successor Holder has made a contribution to their TFSA equal to the deceased’s excess TFSA contribution amount. If that “deemed” contribution amount creates an excess TFSA contribution for the Successor Holder’s TFSA, they will be subject to a 1.0%, per month, penalty tax on the highest amount for each month their TFSA is in an excess contribution state.

Designating beneficiaries

For a TFSA, you can designate a beneficiary that may include a surviving spouse or common-law partner that is not identified as a Successor Holder, children, grand-children, or a Qualified Donee. For a beneficiary, other than a Successor Holder, the following rules guide the administration of the TFSA account upon the holder’s death:

  • The deceased does not include the value of their TFSA account, contributions nor earnings, in their date of death income tax return.
  • The deceased’s TFSA assets are no longer sheltered from taxation after their date of death.
  • The beneficiary will receive the date of death fair market value of the deceased’s TFSA account free of any taxation.
  • The beneficiary cannot transfer the deceased’s TFSA assets into their own TFSA account. (Note: The only exception to this rule is for surviving spouses or common-law partners that are beneficiaries and not named as a Successor Holder. See the section Exempt Contributions by a Survivor* below for more details.)
  • All of the earned income and increase in TFSA asset values between the date of death and the date of the transfer are paid to the beneficiary as taxable income and must be included in their income tax return.
  • Beneficiaries can contribute a portion or all of the deceased’s TFSA assets up the limit of their own unused TFSA contribution room.
  • If no beneficiary or Successor Holder is designated in the TFSA documentation or the deceased’s will, the TFSA assets will be paid to the deceased’s estate and disposed of in accordance with their will.

Note: If the designation of a beneficiary includes a Qualified Donee, the transfer of the TFSA assets to the beneficiary must occur within 36 months after the TFSA holder’s death. In addition, once the transfer has been made and the donation receipt has been received, the executor can request that the deceased’s Date of Death Income Tax Return be adjusted in order to claim the charitable donation tax credit.

Exempt Contributions by a survivor

If you appoint a surviving spouse or common-law partner as your beneficiary, but do not appoint them as the Successor Holder, your surviving spouse and common-law partner can elect to contribute and designate the fair market value of the deceased’s TFSA assets as an Exempt Contribution.To successfully make this election, the amount must be contributed be made within the Rollover Period. In addition, the beneficiary must complete and file the CRA form RC240, Designation of an Exempt Contribution Tax-Free Savings Account (TFSA), within the Rollover Period. The form RC240 must be completed and submitted to the CRA within 30 days after the day the contribution has been made.

An Exempt Contribution is defined by the CRA as “a contribution made during the Rollover Period and designated as exempt by the survivor in prescribed form in connection with a payment received from the deceased holder’s TFSA.”

The Rollover Period is defined by the CRA as “the period that begins when the holder dies and ends at the end of the calendar year that follows the year of death.”

An Exempt Contribution election can only be made for an amount up to the fair market value of the deceased’s TFSA assets as at the date of death. All income and increases above the TFSA asset’s date of death fair market value cannot be included as an Exempt Contribution. Any earned income and increase in TFSA asset values above the date of death fair market value cannot be sheltered from taxation and is distributed to the survivor beneficiary as taxable income.

The Exempt Contribution Election is not available to surviving spouses or common-law partners, named as a beneficiary but not a Successor Holder, in the following instances:

  • At the time of death, the deceased’s TFSA included amounts that are classified as excess TFSA contributions.
  • The designation of beneficiaries includes payments to a survivor and other beneficiaries. For survivor beneficiaries to qualify for the Exempt Contribution Election, they must be the sole-beneficiary of the TFSA.
  • If the survivor payment was made after the Rollover Period.

Estate Planning Note: If you designate a TFSA beneficiary (other than your estate) in the account documentation, then the fair market value of the deceased’s TFSA is not included as an asset of the deceased’s estate and no probate fees are payable.

Note: When planning your designation of a beneficiary for your TFSA account, you should understand the different types of beneficiary designations and the resulting outcomes upon your death. The basic differences arise with how the TFSA assets and income earned after your date of death are treated for income tax purposes and whether or not a surviving spouse will be required to file certain CRA forms within specific deadlines. At the time of your death, the tax-free nature of TFSA accounts ceases immediately before the date of death. You are not required to include the value of your TFSA in your Date of Death Income Tax Return, but all TFSA earnings from the date of death onward, from your TFSA assets, becomes taxable. The only exception to this rule is where you appoint a surviving spouse or common-law partner as the designated beneficiary or Successor Holder of your TFSA account.

 

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