Tax Free Savings accounts- Are they taxable upon death? Who should I name as a Beneficiary?
What’s the best option when it comes to naming a spouse as a beneficiary on your (TFSA) Tax Free Savings Account assets?
Should you leave your (TFSA) to your spouse / common-law partner, Children or someone else?
If you name your spouse as a beneficiary on a (TFSA) you have two options:
1) Name your spouse / common-law partner as a successor annuitant
or
2) Name your spouse / common-law partner as a beneficiary.
I know it sounds the same, but there is a subtle difference. In Ontario you’re allowed to name a regular beneficiary and / or a successor annuitant.
Successor Annuitant Designation
If you name your spouse as the successor annuitant, upon your death they become the new holder and the tax-exempt status of the TFSA is maintained. All of this is done without affecting any of their TFSA contribution room this makes it clean, simple, and seamless. Yes, you read that correctly, they can have maxed out their own TFSA and still transfer your entire TFSA to their plan.
Also by naming your spouse as a successor annuitant means that you avoid probate fees since these assets will pass outside your estate and directly to your spouse / common-law partner. This is usually the best option if you have a spouse.
Beneficiary Designation
When you choose to name your spouse as a regular beneficiary it is a little more complicated. The TFSA assets still passes outside your estate to your spouse on a tax-free basis, but things aren’t quite as straightforward.
Your spouse can transfer the TFSA upon death to their own TFSA, as long as this occurs during the ‘rollover period’. This rollover period ends on December 31st the following year. Transfers during this period are ‘exempt ‘ and again will not affect your spouses TFSA contribution room.
Note: the transfer amount can only be equal to the fair market value of your TFSA at the date of your death. This rule also applies when you’re transferring to a Non-Spouse (such as your child or friend). Any growth on the assets after your death will be taxable. To avoid unwanted taxes we suggest to make this transfer as quickly as possible.
When transferred to a spouse they will be required to complete an extra step .They will need to declare the contribution, so it may be exempt eating up their own contribution room. They 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 their own TFSA to ensure that the contribution does not affect their own TFSA contribution room.
Designation of a (non-spouse) Beneficiary - Child or friend
The TFSA assets still pass outside your estate to your selected beneficiary on a tax-exempt basis except the same rules apply as above. The growth is taxable, the transfer is not as easy but is simple.
The beneficiary would receive your TFSA in cash. They can then add the money to their existing TFSA, as long as they have the contribution room ( see below for a chart of the limits over the years), or they can open one if they do not already have an existing plan. As mentioned above the rules still states that any growth on the assets after the date of death will be taxable. To avoid unwanted taxes it is always best to make this transaction as quickly as possible to limit as much growth as possible.
So in Summary—What is the best strategy when it comes to selecting your spouse to inherit your TFSA assets?
We suggest you consider designating your spouse as successor annuitant.
If you’re like most people, you may not remember whether you designated a beneficiary or successor annuitant or both when you set up your TFSA originally. If you opened your account back when they started in 2009, you really may not recall.
There’s no harm in double checking with your financial advisor. It’s easy to make any necessary changes if they are needed. If your just getting started, now you know which beneficiary to choose.
Here is a breakdown of the two designation types in a chart:
Here is a list of Contribution amounts since 2009 (last updated, January 2019)