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The rules for TFSA beneficiaries
11/24/2017 9:55:29 AM
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Fund Library Q&A
Your questions about financial planning, investments, and portfolio management answered by an industry expert



By Robyn K. Thompson  | Monday, June 26, 2017


 



Q – I recently opened a Tax-Free Savings Account, and I was asked whether I wanted to specify something called a “successor holder” or whether I wanted to designate a beneficiary. I’m not quite sure what the difference is. Could you explain why this is important? – Mary L., Kitchener, Ontario

A – It basically boils down to whether you want the TFSA to go to specific individuals when you die or simply to be folded in as part of your estate to be distributed according to the provisions of your will.

The Canada Revenue Agency recognizes two types of beneficiaries for TFSAs: A survivor (that is, someone who is a spouse or common-law partner of the holder immediately before death) who has been designated as a successor holder; and a designated beneficiary (this could be a survivor who has not been named as a successor holder, former spouses or common-law partners, children, and qualified donees, such as registered charities).

Note that the type of beneficiary can be affected by other designations made for the TFSA, provisions made in a valid will, and the succession legislation applicable in the province where the TFSA holder lives.

Successor holder

In provinces that recognize a TFSA beneficiary designation, a survivor (i.e., spouse or common-law partner) can be designated as a “successor holder” of the TFSA. The successor holder designation means that all the rights of the TFSA are conferred on the spouse or common-law partner, including the right to revoke any beneficiary designation. The spouse or common-law partner thus becomes the new TFSA account holder.

A survivor can also be named as successor holder in the TFSA holder’s will provided the will specifies that the successor holder acquires all of the holder’s rights to the TFSA, including the unconditional right to revoke any beneficiary designation. If the TFSA is a trust arrangement, the trust will continue as the legal owner of the property held in the TFSA.

The key point here is that under a successor holder designation, the TFSA continues to exist as a separate TFSA account in the name of the successor holder, and any income earned after the original holder’s death will continue to be sheltered from tax. And in general, the successor holder’s own unused TFSA contribution room will not be affected. The successor holder can make withdrawals from, and contributions to, the successor TFSA, subject to their own contribution room.

A successor holder may directly transfer funds between accounts, without affecting their available TFSA contribution room.

Designated beneficiary

A TFSA holder may also designate a beneficiaries other than a survivor holder. Beneficiaries could include, for example, a spouse or common-law partner who has not been named as a successor holder, former spouses or common-law partners, and children.

The key benefit of designating a beneficiary is that the beneficiary will not have to pay tax on TFSA withdrawals, as long as the total payments don’t exceed the fair market value (FMV) of all the property held in the TFSA at the time of the holder’s death.

Payments received from such a TFSA can be contributed to a beneficiary’s own TFSA provided they have unused TFSA contribution room available. However, a designated beneficiary who is also a survivor (i.e., spouse or common-law partner) may designate some or all of a survivor payment from a TFSA as an exempt contribution to their own TFSA, without affecting their own unused TFSA contribution room, subject to certain conditions.

If no successor holder or beneficiary is designated in the TFSA or the TFSA holder’s will, the assets in the TFSA are liquidated at fair market value and become part of the holder’s estate to be distributed in accordance with the terms of the deceased holder’s will.

This is by no means a complete explanation of all the twists and turns that can occur with TFSAs (or other registered plans, like RRSPs) when considering estate planning implications. Your best course of action is to consult with a qualified financial planner or your lawyer to ensure you get the estate planning outcome you want. – Robyn

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

© 2017 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

 
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