TFSAs after death: What you need to know

21 June 2021 by National Bank
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There are hundreds of good reasons to open a tax-free savings account (TFSA), from building an emergency fund to saving for a round-the-world trip. What’s really great is that you don’t pay tax on any gains you make in the account. But what happens when the owner of a TFSA dies? Are there any tax consequences? We break it down for you in this article.

Are TFSAs taxable at death?

During the holder’s lifetime, the money in a TFSA grows tax-free. As long as they follow the rules, like not exceeding the contribution limits, there are no penalties. That money, gathered in a TFSA before death, becomes available to the estate, tax-free.

However, it’s important to note that any increase in value—including capital gains, interest and dividends—between the holder’s death and the date the TFSA is closed is taxable.

The increase will be considered to be ordinary income and taxable to the estate or the beneficiaries.

Example: Beatrice

Here’s a hypothetical example. Let’s say that Beatrice had $50,000 in her TFSA when she died. When her account was closed a few months after her death, its value was $52,000. This $2,000 growth in value will be taxable as ordinary income.

This type of situation, where the value of a TFSA changes after the holder’s death, occurs quite frequently, because it can often take time to close the deceased’s account.

If I inherit a TFSA, will it affect my contribution room?

Spouses can benefit from “rollover” (more on this later). In this scenario, the spouse’s contribution room is not affected. In other situations, if you put the money in your own TFSA, then this will impact your contribution room.

If you have any questions, take the time to discuss them with your advisor. Not only can they show you the best ways to protect your money, they can also help you avoid unpleasant surprises from the taxman.

TFSAs after the death of a spouse

If you’ve inherited a TFSA from your spouse or common-law partner, you can add it to your own TFSA as an “exempt contribution”. This doesn’t affect your contribution room (the amount that you’re allowed to put in your account).

This procedure is also known as “rollover”. What are the main conditions for rolling over your late spouse’s TFSA?

  • It must be compatible with the deceased’s wishes.
  • You have to complete form RC240 within 30 days of transferring the proceeds of your spouse’s TFSA to your own.
  • The rollover must take place by December 31 of the year following the year of death. It may be possible to extend this period, but you will have to obtain approval from the Canada Revenue Agency.

Good to know: The rollover applies to the lesser of the following amounts: the fair market value at the time of death and the amount received when the TFSA is closed. Any increase in value after the TFSA holder’s death cannot be rolled over.

Conversely, if the value of the TFSA decreases after the holder’s death, it’s this lower amount that can be rolled over.

Example: Beatrice and Claude

Claude inherited Beatrice’s TFSA when she died. Because they were in a common-law relationship, Claude can transfer the value of Beatrice’s TFSA ($50,000) to his own TFSA without affecting his contribution room. However, the $2,000 increase in value that occurred after Beatrice’s death isn’t included in the amount that can be rolled over. This $2,000 is taxable. It doesn’t have to be put in a TFSA; Claude can do what he wants with it.

Here’s another scenario: Let’s say that Beatrice’s TFSA lost value after her death, decreasing to $48,000 by the time the account was closed. In this case, the amount that Claude can roll over to his TFSA without affecting his own contribution room is $48,000.

TFSA contribution room for children or other beneficiaries

If you inherit a TFSA from someone other than your spouse or common-law partner, you’ll receive the money once the account is closed. This will be the case if you inherit from one of your parents, for example.

You’re then free to choose what you do with the money. One option is to put it in your own TFSA, provided that you have enough unused contribution room.

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If you have any questions, take the time to discuss them with your advisor. Not only can they show you the best ways to protect your money, they can also help you avoid unpleasant surprises from the taxman.

Does a TFSA need to be closed quickly after the holder dies?

It’s down to the executor/liquidator to close the TFSA so that the money can be transferred to the estate or directly to the beneficiaries.

Why does it matter?

After the account holder dies, capital gains and income from investments in the TFSA lose their nautre. As we mentioned before, any increases in value after death are taxable. By closing the TFSA as soon as possible, you minimize the period during which increases in value are taxable as ordinary income.

Once the investments are moved to the estate account, capital gains and investment income retain their nature and tax advantages. For example, capital gains will be taxable at the 50% inclusion rate only at the time of disposition, and dividends will give rise to a dividend tax credit.

This is a complicated subject, so don’t hesitate to seek the advice of a professional, such as a financial planner. It’s their job to explain how it all works and help you make the right decisions.

Are TFSAs closed automatically after the holder dies?

It usually takes some time to close a TFSA after the holder dies. This is because the financial institution requires certain documents to close the account. You may be asked to provide the following documents:

  • A death certificate
  • Proof that you are the executor (in charge of administering the estate)
  • In Quebec, will search certificates
  • A copy of the deceased’s last will
  • A probated will (does not apply in Quebec)

Can the deceased’s TFSA pass outside the estate? 

You can name your spouse as the “successor holder” of your TFSA. This means that the surviving spouse automatically becomes the new holder of the deceased’s TFSA.

In Quebec, this option is only available for certain types of TFSA, often available from insurance companies.

To find out whether this strategy is right for you and get answers to all your questions, don’t hesitate to ask for expert help planning or administering an estate. Professionals like financial planners can help simplify the process, guiding you through each step so you don’t forget anything. We're here to answer your questions.

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