All About Estates

Designating a successor for the TFSA

Designating the surviving spouse or common-law partner as the successor holder of the Tax Free Savings Account “TFSA” simplifies the administration of transferring the account upon the death of the decedent.  A successor holder may only be a spouse or common-law partner.

All provinces and territories in Canada, except Quebec, recognize the designation of a successor holder of a TFSA in the contract itself although the designation can also be accomplished in the deceased’s will[1]. If you live in Quebec, you cannot name a successor holder or beneficiary on your plan documentation – you must do so in your will.

When a successor holder of the TFSA is designated, then the survivor automatically becomes the holder of the deceased’s TFSA at the time of death. The automatic transfer of the TFSA would be considered a direct “exempt contribution” to the survivor’s TFSA account and therefore does not affect their contribution room with no other potential tax consequences.  The survivor can then make contributions or withdrawals from this account depending on their own unused TFSA contribution room or consolidate this account with their own TFSA.

What if the TFSA did not have a designated successor holder in the contract and no designation was provided for in the will, can the surviving spouse or common-law partner still receive an exempt contribution? This specific question was directed to Canada Revenue Agency “CRA” at the 2020 Financial Strategy and Instrument Taxation conference[2]

The factual details in the question presented to CRA are summarized as follows:

  • X died in 20X1 and at the time of his death owned a TFSA of $100,000,
  • A successor holder designation was not provided for in the contract or the will and thus the TFSA formed part of his residual property,
  • In the will, he left all his residual property to a spousal trust created under the will and the trust was to pay a capital amount of $100,000 per year to his surviving spouse, Ms. X, and
  • After Mr. X’s death, the liquidator of the estate transferred the full value of the TFSA ($100,000) to the spousal trust and then paid the same amount to Ms. X, which she contributed to her TFSA before December 31, 20X2.

The CRA was asked if the contribution amount to Ms. X’s TFSA would meet the definition of “exempt contribution” in s. 207.01(1) of the Income Tax Act “Act” resulting in the same treatment as if she was designated as a successor holder.

The CRA confirmed that the amount ($100,000) would generally qualify as a survivor payment for the purpose of the above “exempt contribution” definition based on the understanding that the following conditions were met:

  • the distribution was made in accordance with the terms of the will of the deceased,
  • the contribution was made during the rollover period, which begins when the individual dies and ends on December 31st of the calendar year following the year of death,
  • the payment was made, directly or indirectly, to the survivor during the rollover period as a consequence of the individual’s death,
  • The surviving spouse designates, in prescribed form filed within 30 days after the day on which the contribution is made, and
  • The amount of the contribution does not exceed specified limits.

When the amount is distributed under the terms of the decedent’s will, the CRA would generally consider the amount to be distributed as a consequence of death under paragraph 248(8)(a) of the Act.

Therefore, designating a successor holder is the best course of action to efficiently transfer the TFSA to the surviving spouse or common-law partner to ensure there are no tax consequences, but if the deceased did not designate a successor holder, a transfer executed by the executor or executrix can still accomplish the same result – with just a few extra steps and conditions.

 

[1] A survivor can be named in the deceased holder’s will as a successor holder to a TFSA, if the terms of the will state that the successor holder receives all of the holder’s rights including the unconditional right to revoke any beneficiary designation, or similar direction imposed by the deceased holder under the arrangement or relating to property held in connection with the arrangement. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/death-a-tfsa-holder/successor-holder.html

[2] This conference was held on October 7, 2020

About John Oakey
National Tax Director for Baker Tilly Canada. John has extensive experience with Canadian corporate and personal income taxes with specialization in the areas of corporate reorganizations, estate planning, succession planning and tax compliance. He also has significant experience dealing with GST/HST issues and U.S. citizen cross-border tax reporting issues.

1 Comment

  1. John Oakey

    January 14, 2022 - 2:48 pm
    Reply

    We received the following much appreciated additional information from Ann Elise Alexander, Senior Counsel, CIBC Toronto:

    • In Quebec, for TFSAs structured as deposits or trusts, generally those offered by banks and brokers, you cannot made a successor holder designation at all, even in your will. See the article by Murray Sklar, Death of a TFSA Holder in Will Power October 2010 CCH

    Naming or “electing” the survivor to be successor holder is a beneficiary designation. Assets that pass by beneficiary designation pass outside the estate or succession and do not come under the control of the estate representative so the beneficiary does acquire all of the rights of the TFSA without anyone else’s rights intervening. Beneficiary designation can only occur in provinces that have beneficiary designation legislation. TFSAs can be structured as a deposit, trust or annuity. All provinces other than Quebec, have legislation that allows beneficiary designation on all types of TFSAs. This legislation says the designation can be made in an instrument or a will. But even when made in a will, it has to be a designation and it is only because of the specific beneficiary designation legislation that the asset does not pass through the estate. Quebec only has legislation that allows beneficiary designation on annuity-type TFSAs. Therefore, Even if there is a specific bequest or particular legacy of the TFSA in the will, or even if the survivor is the sole intestate heir, the survivor is not the first person to “acquire all the rights” of the deceased holder to the TFSA. In Quebec, the liquidator of the deceased has an intervening seisin in the assets of the deceased. This seisin allows the liquidator to use the property to pay debts. The liquidator thus has a right of some kind to the TFSA and thus the survivor has not acquired “all the rights”. So Quebecers who hold TFSAs structured as trusts or deposits cannot effectively name their survivor as a successor holder at all, whether in an instrument or a will. They can name the survivor a specific legatee of the TFSA, and the survivor can then avail themselves of the “exempt contribution” process, but they cannot become a successor holder. This issue was raised with both Quebec and the Federal governments shortly after TFSAs were launched in 2009, but neither jurisdiction has been willing to change its legislation on this point.

    • The “exempt contribution” is only needed and available where there is no valid successor holder designation and the assets are passing indirectly to a survivor. If a valid successor holder is in place, the survivor takes over as holder of the deceased’s TFSA and there is no contribution of any kind for tax purposes.

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