With mobility on the rise, it is expected that a person leaving Canada will have to visit the rules on tax-free savings accounts (TFSA) and Canadian tax residency. Executors may have to consider the TFSA rules if a deceased’s will calls for the transfer of a TFSA account to a non-resident will beneficiary.
If a Canadian tax resident has a TFSA and leaves Canada, the accumulated funds may remain in the TFSA account without Canadian tax consequences. The non-resident can’t make further TFSA contributions while a non-resident. If the non-resident does make a contribution then the Canada Revenue Agency (CRA) will levy a penalty tax of 1% of the contribution each month until the earlier of two dates – the date the excess contribution is withdrawn and the date non-resident becomes a Canadian tax resident.
Withdrawals may be made while a non-resident. Contribution room will not grow while a non-resident. Any withdrawals made while a non-resident will be added back to any unused TFSA contribution room, which comes available if and when the non-resident becomes a Canadian tax resident.
Non-residents account holders do not pay Canadian tax on TFSA earnings and withdrawals from the TFSA. That said, any payments made to a non-resident TFSA beneficiary from a deceased holder’s TFSA are included in the beneficiary’s income to the extent the payment exceeds the TFSA value at the time of death. Non-resident Canadian tax will be withheld on the excess and the net amount is paid to the non-resident beneficiary.