Designated beneficiaries may 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.
A designated beneficiary will not have to pay tax on payments made out of the TFSA, as long as the total payments does not exceed the fair market value (FMV) of all the property held in the TFSA at the time of the holder's death.
Beneficiaries (other than a survivor) can contribute any of the amounts they receive to their own TFSA as long as they have unused TFSA contribution room available.
A survivor who is a beneficiary has the option to contribute and designate all or a portion of a survivor payment as an exempt contribution to their own TFSA. As long as they meet certain conditions and limits, this transaction will not affect their own unused TFSA contribution room. For more information, see Designation of an exempt contribution by a survivor.
If, at the time of death, there was an excess TFSA amount in the deceased holder's TFSA, a tax of 1% per month is payable on the highest excess amount for each month the excess stayed, up to and including the month of death. The legal representative must file Form RC243, Tax-Free Savings Account (TFSA) Return, and Form RC243-SCH-A, Schedule A – Excess TFSA Amounts.
If no successor holder or beneficiary is designated in the TFSA contract or will, the TFSA property is directed to the deceased holder's estate and distributed in accordance with the terms of the deceased holder's will.
General rules – deposit or annuity contract
If there is no successor holder, the TFSA ceases to exist when the holder of a deposit or an annuity contract under a TFSA dies. The holder is considered to have disposed of the contract or the deposit immediately before the time that the TFSA ceased to exist for an amount equal to the FMV of all the property held in the TFSA at the time of death.
After the holder's death, the deposit or annuity contract is considered to be a separate contract and is no longer considered as a TFSA. All earnings that grow after the holder's death will be taxable to the beneficiary.
The normal rules apply for reporting income or gains accrued after the date of death, depending on the specific characteristics of the deposit or annuity contract. For example, interest earned would be reported on a T5, Statement of investment income.
General rules – arrangement in trust
If there is no successor holder, a TFSA that is an arrangement in trust is deemed to continue and it stays a non-taxable trust until the end of the exempt period.
All income earned during the exempt period and paid to the beneficiaries, will be included in their income, while earnings that accrued before death remain exempt. In other words, any amount up to the FMV of the deceased holder's TFSA as of the date of death can be paid to beneficiaries, without them having to report any amount as income. Any amount paid to beneficiaries that represents an increase in the FMV after the date of death is taxable to the beneficiaries and has to be reported by them as income. Such payments will appear in box 134 "Tax-Free Savings Account taxable amount" in the "Other information" section of a T4A, Statement of Pension, Retirement, Annuity, and Other Income.
The trust has the exempt period within which to distribute both the taxable and non-taxable amounts. The trustee will assign the part of each payment that represents non-taxable FMV at the date of death with the rest being taxable.
Payments of amounts earned above the FMV made by the trust to a non-resident beneficiary, including a non-resident survivor, from a deceased holder's TFSA during the exempt period are reported on an NR4, Statement of Amounts Paid or Credited to Non-Residents of Canada. These payments are subject to non-resident withholding tax.
If the trust continues to exist beyond the end of the exempt period (for example, not all amounts from the deceased's TFSA have been paid to beneficiaries), it will be taxable from that point forward. It becomes a taxable inter vivos trust with a tax year beginning 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 that time. For as long as it continues to exist, the trust would itself be taxable on any undistributed income (including, for its first tax year, any undistributed income or gains during the exempt period) and required to annually file a T3RET, T3 Trust Income Tax and Information Return. The trust will also be required to prepare a T3, Statement of Trust Income Allocations and Designations, in that year or later years for any distributions of taxable amounts to beneficiaries.
Martin's mother, who lived in a province that recognizes a TFSA beneficiary designation, passed away on January 9, 2020. The value of her TFSA on that date was $11,000. There was no excess TFSA amount in her account. In her TFSA contract, she had named Martin as the sole beneficiary. Her estate was settled on June 7, 2020. By that time, $200 in additional income had been earned and the full amount of $11,200 was paid to Martin.
The value of Martin's late mother's TFSA as of the date of her death — $11,000, is not taxable. The income earned after the date of her death, $200, is taxable to Martin. He will receive a T4A slip showing this amount in box 134 "Tax-Free Savings Account (TFSA) taxable amount" in the "Other information" section. Martin can contribute any of the amounts he receives to his own TFSA as long as he has unused TFSA contribution room available.
Management fees related to a TFSA trust and paid by the holder are not considered to be contributions to the TFSA. The payment of investment counsel, transfer, or other fees by a TFSA trust will not result in a distribution (withdrawal) from the TFSA trust.
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