If you are a designated beneficiary of a TFSA
Quebec does not recognize the designation of beneficiary for deposit TFSAs or arrangements in trust. For more information, refer to Beneficiary designation in Quebec.
On this page
- What is a designated beneficiary
- Tax implications for the deceased holder
- Tax implications for the beneficiary
What is a designated beneficiary
A designated beneficiary may be a survivor, family member, or other person or organization that is named as a beneficiary of the TFSA in either the TFSA contract or in the will of the deceased holder.
This may include:
- a survivor of the deceased who is not named as successor holder
- former spouses or common-law partners
- children
- a subsequent survivor holder who is the new spouse or common-law partner of the successor holder
- qualified donees
Survivors may make exempt contributions
A survivor who is designated as a beneficiary, or a surviving spouse or common-law partner in Quebec, may contribute all or part of their survivor payment to their own TFSA and designate it as an exempt contribution. This contribution will not affect their own available contribution room.
However, if there is an excess in the deceased holder’s TFSA or if payments are received by more than one survivor, the contribution cannot be exempt.
How to designate an exempt contribution
A contribution can be designated exempt if the following criteria are met:
- The survivor receives the amount and contributes it to their TFSA during the rollover period
- The total exempt contribution is not more than the fair market value (FMV) of the deceased holder’s TFSA at time of death (the TFSA issuer or estate executor should be able to provide the FMV)
- The survivor uses the form Designation of an exempt contribution (Form RC420) to determine the maximum amount that can be designated as an exempt contribution
- The survivor sends Form RC240 to the CRA within 30 days of making the contribution (or later if CRA permits)
Beneficiaries who are not survivors
A beneficiary who is not a survivor may contribute any amount they receive to their own TFSA if they have available contribution room. They may not designate any amount as an exempt contribution.
Beneficiaries who over-contribute to their own TFSA may be taxed 1% per month for each month the excess amount stays in the account. Always check your available contribution room before making a contribution.
For more information:
Donations to a qualified donee
If a qualified donee is designated as a beneficiary of the deceased holder’s TFSA, the funds must generally be donated (transferred) to the donee within 36 months of the holder’s death.
When the donation is completed, the executor of the deceased holder’s estate may ask the CRA to change the deceased holder’s Income Tax and Benefit Return for the year of death to claim the charitable donation tax credit.
Tax implications for the deceased holder
If the deceased holder’s TFSA contains an excess amount at the time of death, there are tax implications for their estate. An excess amount can occur when a TFSA holder contributes more than their available contribution room allows.
An excess amount is taxable to the deceased holder at a rate of 1% per month for each month it stays in the account, up to and including the month of death.
For more information: How excess amounts are taxed
The deceased holder’s legal representative must file the following forms for that period:
Tax implications for the beneficiary
A designated beneficiary does not have to pay tax on any amount they receive from a TFSA as long as the total amount is not more than the fair market value (FMV) of the property held in the TFSA on the date of death.
However, any TFSA earnings made after the date of death and before the estate is settled are taxable. The tax implications depend on the type of TFSA.
Beneficiaries should check with the TFSA issuer or with the deceased holder’s legal representative to find out what type of TFSA it is.
For more information: Different types of TFSAs
Taxes on a deposit or annuity contract TFSA
If there is no successor holder, the deposit or annuity contract stops existing when the holder of the TFSA dies.
The deceased holder is considered to have disposed of their TFSA immediately before the time of death for an amount equal to the fair market value (FMV) of all the property held in the TFSA at that time. The deposit or annuity contract becomes a separate contract and is no longer considered to be a TFSA.
All earnings that grow after the deceased holder’s death are taxable to the beneficiary.
Depending on the specific characteristics of the deposit or annuity contract, the normal rules apply for reporting income or gains earned after the date of death, such as reporting any interest earned on a T5 Statement of Investment Income.
Taxes on an arrangement in trust TFSA
If there is no successor holder, a TFSA that is an arrangement in trust continues to exist and stays non-taxable until the end of the exempt period. However, income earned during the exempt period and paid to beneficiaries is taxable income.
This means that any amount up to the fair market value (FMV) of the deceased holder’s TFSA on the date of death can be paid to beneficiaries without them having to report it as income. But any amount paid to beneficiaries that is more than the FMV on the date of death is taxable and beneficiaries must report this as income. These payments are in box 134 in the T4A Statement of Pension, Retirement, Annuity, and Other Income.
The trust must distribute both the taxable and non-taxable amounts during the exempt period. The trustee will indicate the part of each payment that is non-taxable, with the rest being taxable.
If the trust exists after the exempt period
If the trust continues to exist after the end of the exempt period (for example, if not all amounts from the deceased’s TFSA have been paid to beneficiaries), it will be taxable from that point forward.
After the exempt period ends, the trust becomes a taxable inter-vivos trust (a living trust) with a tax year that begins January 1 of the following calendar year. The trust will be treated as having disposed of and immediately reacquired its property for its FMV at the end of the exempt period.
The trust will have to file a T3 Trust Income Tax and Information Return (T3RET) every tax year. It will also have to prepare a T3 Statement of Trust Income Allocations and Designations in that year or later years for any distribution of taxable amounts to beneficiaries.
Non-resident beneficiary
If you are a non-resident beneficiary, including non-resident survivor, you must report payment amounts you receive from the trust during the exempt period that are above the fair market value (FMV) of the TFSA. These payments are subject to non-resident withholding tax.
For more information: If you are a non-resident beneficiary of a TFSA