Examples – Tax treatments
There are tax treatments that apply under TFSA governed by a trust. Although we do not cover all situations, we are providing three of the most common situations that are likely to occur and their outcome. Each of the examples below have the following three situations:
- Holder date of death – February 15, 2020
- No successor holder of the TFSA
- FMV of the properties in the TFSA immediately before the death of the last holder – $11,000
The estate is settled on September 30, 2020, 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 2021.
The estate remains unsettled at the end of the calendar year of death, December 31, 2020. Properties held within the TFSA on December 31, 2020, 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, 2020) to the end of 2021. 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.
The estate is still not settled but a payment is made to a beneficiary on July 15, 2020. 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 2020 tax year. The trustee will report the transaction by the end of February 2021.
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 2021. The balance remains in the TFSA trust until it is distributed or until the end of the exempt period (December 31, 2021), 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, 2022. Any taxable income that had not previously been distributed will become income of the trust in that first taxable year.
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