TFSAs: Whether to Designate a Beneficiary or a Successor Holder ?

If you want your spouse or common-law partner to inherit your Tax-Free Savings Account (“TFSA”) you have two designation options. You can name then as a “beneficiary” or you can name them as a “successor holder.” There is a significant difference between the two from a tax planning point of view.

Generally speaking, with a beneficiary designation, the assets in the TFSA are transferred to your spouse or common-law partner on a tax-free basis up to the fair market value of the account at the time of your death. Any amounts that are transferred to your spouse that exceed the fair market value of the account at the time of your death will be taxable in the hands of your spouse. Your spouse has the option of making an “exempt contribution” of the TFSA proceeds to their own TFSA without affecting their own unused contribution room. To do this, he or she must receive and contribute all or a portion of the TFSA proceeds to their own TFSA before the end of the calendar year following the year of your death (“the rollover period”) and must designate the payment as an exempt contribution on the Canada Revenue Agency’s (“CRA”) form RC240 – Designation of an Exempt Contribution of Tax-Free Savings Account – within 30 days after they make the contribution. The proceeds pass outside of the estate and directly to your spouse of common-law partner so they will avoid probate fees.

If you name your spouse or common-law partner as a successor holder of your TFSA, he or she automatically becomes the holder of your account at the time of your death and the TFSA continues to exist. It is simply a matter of changing the name on the account. The value of the TFSA upon your death, as well as any income earned after your death, will continue to be sheltered from tax. Your spouse or common-law partner can then make tax-free withdrawals from or make contributions to that account after your death, depending on their own unused TFSA contribution room. If your spouse or common-law partner already has their own TFSA, they can maintain two separate TFSA accounts, or consolidate the two accounts, by directly transferring all or part of the value from one account to the other, without affecting their own TFSA contribution room. Like the beneficiary designation, the proceeds pass outside of the estate and directly to your spouse or common-law partner, so they will also avoid probate fees.

The biggest difference, tax-wise, between the two designations, is that with a successor holder, any income or growth in the account, after your death will continue to be sheltered from tax. With a beneficiary designation, your beneficiary must pay tax on any increase in the value of your TFSA since the date of your death.

It is important to consider, when creating an estate plan, the appropriate designation to reflect how you want your spouse or common-law partner to inherit your TFSA. You should review all of your designations once a year to ensure that they are up to date and that they still reflect your personal situation.