What Happens to a TFSA After the Year-End Following Death in Canada?

This answer covers Canadian federal tax law, which applies in every province.

How a TFSA is taxed after death depends on whether a successor holder took over and on the type of account. If a successor holder takes over, the account continues as a TFSA with its tax-free status intact, except where the deceased had an excess TFSA amount, and Quebec does not recognize these designations.

Without a successor holder, a trust-governed TFSA keeps limited TFSA treatment during the exempt period, which ends at the earlier of the end of the year following the year of death or when the trust ceases to exist. Income earned during that period and paid to beneficiaries is taxable to them, and payments above the fair market value at death appear in box 134 of the T4A. Without a successor holder, a deposit or annuity TFSA stops being a TFSA on death, and all earnings after death are taxable to the beneficiary. Beneficiaries generally pay no tax on amounts up to the fair market value at death.

If a trust TFSA still exists after the exempt period, it becomes a taxable trust and must file a T3 return every tax year it continues. Its first taxable year includes post-death income or gains not paid out earlier. A lawyer or accountant can confirm which type of account you have.