Tax-Free Saving Account (TFSA) After the Holder’s Demise 

A Tax-Free Saving Account (TFSA) is a commendable financial instrument that promotes tax-free savings among Canadians. It’s imperative to grasp the tax and legal repercussions that emerge when a TFSA account holder passes away, and the subsequent impact on their family. 

1. No Beneficiary Designated:

• If no beneficiary is specified, the TFSA assets become part of the deceased’s estate. 
• These assets are then allocated to the beneficiaries as per the deceased’s Will or based on regional intestacy laws. 
• Such assets might also be liable for probate fees. 
• The TFSA account terminates on the date of the holder’s death, and any income accumulated until then is tax-free. 
• Any subsequent increase in the account’s value becomes part of the estate and may be taxed either within the estate or in the beneficiary’s hands. 
• Non-spouse beneficiaries can only add the proceeds to their TFSA if they have adequate contribution room. 

2. Beneficiary Designated:

• Beneficiaries can be nominated either in the account documents or the will. 
• The primary benefit of naming a beneficiary is that the TFSA proceeds bypass the estate, thus avoiding probate fees. 

Types of Beneficiaries: 

• Spouse: 
• Successor Holder: Only a surviving spouse can be designated as a successor holder. Upon the account holder’s death, the spouse automatically assumes ownership of the TFSA, which doesn’t impact their own TFSA contribution room. Note that some provinces don’t recognize the “successor holder” designation. 

• Beneficiary: If a spouse is designated as a beneficiary, they have until the end of the following year after the death to contribute the account’s value at the time of death to their TFSA without affecting their contribution room. This is termed an “exempt contribution.” They must submit form RC240 to the Canada Revenue Agency (CRA) within 30 days of making such a contribution. This exemption is exclusive to spouses. 

• Major Child or Third Party: 
• Such beneficiaries aren’t taxed on the TFSA proceeds as long as the total doesn’t surpass the account’s fair market value at the time of the holder’s death. Any excess value might be taxed either within the estate or in the beneficiary’s hands. They can contribute the proceeds to their TFSA, provided they have the necessary contribution room. 

• Minor Child: 
• The tax implications are identical to those for a major child. However, regional laws might prevent a minor from directly receiving the TFSA proceeds due to potential legal constraints. It’s wise to seek legal counsel in such scenarios.