A tax-free savings account ("TFSA") is a flexible savings option that can be used for various financial goals, such as saving for a major purchase, an emergency fund, or retirement savings. It offers a significant advantage in that all investment growth within the account is completely tax-free.
Probate Treatment
You are permitted to designate a beneficiary (or multiple beneficiaries) on your TFSA account. Doing so allows the asset transfer directly to the named beneficiaries, outside of your estate, and thus bypasses the probate process. This means the asset moves into the hands of beneficiaries faster and without your estate paying probate taxes on the value of your TFSA.
Successor Holder vs Beneficiary
It's important to note the difference between designating a successor holder and a beneficiary of your TFSA. Only a spouse or common law partner can be named as a successor holder of a TFSA. The result of being a successor holder is that the TFSA effectively becomes the successor holder's TFSA and the account remains tax-free. There is also no impact on the successor holder's TFSA contribution room.
If your spouse named you as the beneficiary of their TFSA (rather than the successor subscriber), the account's value at the time of their death can be paid to you or transferred to your TFSA tax-free. However, if the TFSA increased in value after their death, that increase is considered a "Tax-Free Savings Account taxable amount" and must be reported on a T4A slip, to be included in your income for the year you received it. Note that if the transfer to your TFSA is completed by December 31 of the year following your spouse's death, the market value at the date of death is considered an "exempt amount" and does not affect your TFSA contribution room.
So, if you were named as either the successor holder or the beneficiary of a spouse's TFSA, both designations would avoid probate. However, only being named as the successor holder would avoid any tax implications. As a beneficiary, you might have to pay taxes if the account increased in value.
Estate as Beneficiary
If the beneficiary is designated as the "estate" or if no beneficiary is named on the TFSA account, the TFSA is still paid into the deceased's estate, but probate fees need to be paid to access the TFSA. Once available, the proceeds are distributed either according to a valid will or, in its absence, according to the intestacy laws of the deceased's jurisdiction. Any growth in the TFSA value after the date of death will be taxable to the estate.
Don't Forget
As part of your estate planning, ensure that all beneficiary designations are up-to-date and correctly documented with your financial institution to avoid any confusion or legal complications after your death.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.