TFSA’s and Estates

Many Canadians have taken advantage of the Tax-Free Savings Accounts (TFSA) since their advent in 2009, but as a quick recap: they don’t reduce your taxable income when you invest in them; only the income earned on these investments is sheltered from tax. As a result, withdrawals from a TFSA are not taxable; they are not income.

When a person passes away their investments are all deemed to have been sold. In the case of a TFSA this does not result in any significant income tax, however that value may be included in the calculation of the Estate Administration Tax (historically and still commonly called Probate Fees) which is imposed by the Ontario government on the value of all the property that belonged to the deceased at the time of his or her death.

Having a will does not prevent Probate Fees being applied on TFSAs. In order to achieve that, you must name the beneficiary in the TFSA account itself.

There are two types of TFSA beneficiaries: Successor Holders, which are spouses or common-law partners, and Beneficiaries, which can be anyone. The Successor Holders are able to take over the ownership of the TFSA with no limits, no probate fees and no income tax. There are more restrictions on regular Beneficiaries, but at least probate fees won’t be payable. In the case of a non-spouse Beneficiary, any growth in the value of the TFSA after the date of death will be taxable to them and they will need room in their own TFSA to maintain the tax-free status of the funds.

Make sure you contact your financial institution or advisor to verify or change your TFSA designations.

Gwyneth James MBA CPA, CGA

Cody & James Chartered Professional Accountants