Tax-Free Savings Account - Naming a Successor Holder

By now, most of us have heard of the Tax-Free Savings Account (TFSA) which was introduced in the February 26, 2008 Federal Budget. It is a registered account in which investment earnings, including capital gains, accumulate tax free.

Beginning in January 2009, taxpayers over the age of 17 may contribute up to $5,000 each year to such an account. If a taxpayer's contribution room is not used in one year it may be carried forward to the next year allowing for a larger contribution in that year. In some ways the TSFA is similar to an RRSP and in a lot of ways it is not. Contribution room in TFSA does not depend on "earned income" but is a flat $5,000 per year. Unlike the RRSP, contributions to a TSFA do not result in an income tax deduction and withdrawals from a TFSA are not reported as income nor included in income for any income-tested benefits, such as the Canada Child Tax Benefit or Goods and Services Tax Credit.

The CRA will establish contribution room for all taxpayers on the basis of income tax returns filed. Taxpayers who do not file for a number of years may establish their contribution room by filing those returns.

Upon death of the TFSA holder, the funds within the account may be rolled over into their spouse's TFSA (before the end of the calendar year following the year of death) or they may be withdrawn tax-free. If the TFSA is not rolled over, any amounts earned within a TSFA after the death of the taxpayer are taxable to the estate or the recipient if paid out before the end of the first calendar year following the year of death. If the contents of a TFSA are donated to a registered charity in the taxpayer's will, the donation is deemed to have been made immediately before the taxpayer's death.

One question that many people ask is who can receive the proceeds when the TFSA account holder dies? Although TFSAs are federally regulated accounts, provincial legislation determines if a beneficiary can be named in a TFSA contract. Under the Income Tax Act, the tax exempt status of the account only applies to the spouse or common law partner, so if the named beneficiary of the account upon death is someone other than a spouse or partner, the account is no longer considered to be a TFSA.

Most provinces and territories have now enacted legislation allowing TFSA beneficiaries to be named that aren't spouses or partners, and therefore, upon the death of a TFSA holder, the beneficiary can have the TFSA assets passed on to them without going through the estate and subject to expensive probate fees.

We have provided a summary below of the successor holder and beneficiary recognition by province:                                                      

Educational Resources: For more information on tax planning provisions and compliance requirements subscribe to The Knowledge Bureau's online tax reference for taxpayers, financial advisors and their clients: EverGreen Explanatory Notes.