Death of a Tax-Free Savings Account holder
The topics below provide information on the reporting requirements that apply when the last holder dies and, as a result, the arrangement ceases to be a tax-free savings account (TFSA).
This information does not apply if the holder named their spouse or common-law partner as the successor holder of the TFSA. If this is the case, the arrangement maintains its tax-exempt status as a TFSA.
The tax treatment and reporting requirements depend on whether the TFSA is a deposit, an annuity contract, or a trust.
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When the last holder of a deposit or an annuity contract TFSA dies, the arrangement ceases to be a TFSA. The FMV of the TFSA at the date of death will be received tax-free by the deceased’s estate or other designated beneficiaries. There are no reporting requirements for these amounts.
Any investment income or gains that accrue under the former TFSA after the date of death will be taxable under the regular taxation rules that apply depending on the specific characteristics of the deposit or annuity contract. For more information on how to report these amounts, see Guide T4015, T5 Guide – Return of Investment Income, or Guide T4013, T3 Trust Guide, as applicable.
When the last holder of a TFSA which governs a trust dies, the arrangement continues to be treated as a TFSA for certain limited purposes. The main effect is to allow the trust to maintain its tax-exempt status until the end of the exempt period, which is the earlier of the end of the year following the year of death of the holder or when the trust ceases to exist.
While the trust maintains its exempt status, any payment made from the trust during the exempt period to the deceased’s estate or another designated beneficiary will be included in the recipient’s income for the year it’s received, except to the extent designated by the trust as being attributable to the FMV of the TFSA at death.
That is, only the portion of the payment that represents the distribution of post-death investment income or gains will be taxable.
Designated beneficiaries
Designated beneficiaries can include a survivor who has not been named as a successor holder, former spouses or common-law partners, children, a designated subsequent survivor holder who is the new spouse or common-law partner of the successor holder, and qualified donees.
Example of tax treatments
- holder date of death – February 15, 2023
- no successor holder of the TFSA
- FMV of the properties in the TFSA immediately before the death of the last holder – $11,000
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Situation 1
The estate is settled on September 30, 2023, and the TFSA is disposed of at a FMV of $11,000.
Tax treatment for situation 1:
The distribution can be made without tax consequences. The trustee, technically, makes a designation that the entire payment is from the non-taxable pool of pre-death FMV. No T4A slip is required but the transaction (the distribution) has to be reported to the CRA by the end of February 2024.
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Situation 2
The estate remains unsettled at the end of the calendar year of death, December 31, 2023. Properties held within the TFSA on December 31, 2023, have a FMV of $13,000. It is assumed from the facts that the trust continues to administer the TFSA.
Tax treatment for situation 2:
From the information provided, the exempt period in this example is the period from the date of the holder’s death (February 15, 2023) to the end of 2024. Even though there was a taxable growth, but since the proceeds continue to be held by the trust (that is, no distributions [payments] are being made), no T4A slip is required. As well, there is no requirement for T3 reporting since the trust itself is deemed to retain its non-taxable status until the end of the exempt period.
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Situation 3
The estate is still not settled but a payment is made to a beneficiary on July 15, 2023. At the time of the payment the FMV of the properties still held by the TFSA has appreciated to $15,000. In scenario (a) the entire $15,000 is distributed to the beneficiary. In scenario (b) only $11,000 is distributed.
Tax treatment for situation 3:
In scenario (a), the trustee determines that up to $11,000 of the payment may be designated as being made out of the non-taxable pool, which leaves the remaining $4,000 as a taxable payment. The $4,000 is reported on a T4A slip. The income must be recorded in box 134 "Tax-Free Savings Account (TFSA) taxable amount," in the "Other information" section of the T4A slip, and is included on the beneficiary’s tax return for the 2023 tax year. The trustee will report the transaction by the end of February 2024.
In scenario (b), the trustee determines that up to $11,000 of the payment may be designated as being made out of the non-taxable pool. A lesser amount may be designated as a distribution from that pool. To the extent that the payment is not from that pool, it is a taxable payment to the beneficiary to be reported to us by the end of February 2024. The balance remains in the TFSA trust until it is distributed or until the end of the exempt period (December 31, 2024), whichever occurs earlier. Should the balance of the funds remain in the trust after the end of the exempt period, the trust then becomes an ordinary taxable trust with a tax year beginning January 1, 2025. Any taxable income that had not previously been distributed will become income of the trust in that first taxable year.
You have to prepare and file a T4A slip to report any taxable payments that you make each year during the exempt period to a beneficiary who is a resident of Canada. You do not need to report amounts that are required to be included in the income of a trust that is a former TFSA trust in its first taxable year. There is no requirement to withhold tax on these amounts.
The income must be recorded in box 134 “Tax-Free Savings Account taxable amount” in the “Other information” section of the T4A slip. Send copies of the T4A slip to the recipient’s last known address.
Note
You can also send a copy of one of these slips in electronic format to the recipient if you received the recipient’s consent in writing or electronic format.
For more information, go to Guide RC4157, Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary.
You have to prepare and file an NR4 slip to report any taxable payments that you make each year during the exempt period to a beneficiary who is a non-resident of Canada. You are also required to withhold and remit non-resident withholding tax on these payments.
For more information on how to fill out an NR4 information return, go to Guide T4061, NR4 – Non-Resident Tax Withholding, Remitting, and Reporting.
If the trust still exists at the end of the exempt period, the trust will become taxable from that point forward and will have to file a T3RET, T3 Trust Income Tax and Information Return, each year that it continues to exist. In its first taxable year, the trust will be required to include in its income any post-death income or gains that were not paid out to beneficiaries during the exempt period.
Forms and publications
- Guide RC4157, Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary
- Guide T4013, T3 Trust Guide
- Guide T4015, T5 Guide - Return of Investment Income
- Guide T4061, NR4 - Non-Resident Tax Withholding, Remitting, and Reporting
- NR4, Statement of Amounts Paid or Credited to Non-Residents of Canada
- T3RET, T3 Trust Income Tax and Information Return
- T4A, Statement of Pension, Retirement, Annuity and Other Income
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