Is a TFSA Taxable on Death in Canada? Who Pays and When

If you are an executor or an heir, one of the first questions after a death is whether the Tax-Free Savings Account (TFSA) will be taxed on the final return or in the recipient's hands. The short answer is that the balance at death is generally not taxed, but there are important exceptions.

This article explains who receives a TFSA, what is normally tax-free, what can still be taxed, and what an executor should check before money is paid out.

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

The general rule

Beneficiaries generally pay no tax on amounts up to the TFSA's fair market value at the date of death. That value passes tax-free with no reporting required for that amount. Fair market value means the highest price, expressed in money, obtainable in an open and unrestricted market between informed, prudent parties dealing at arm's length, neither under compulsion to buy or sell.

The tax-free part is limited to that date-of-death value. Anything the account earns afterwards is treated differently, as explained below.

Who receives the TFSA

What happens depends on who is named. There are three main outcomes:

• A successor holder, who is the surviving spouse or common-law partner named in the contract or will, immediately becomes the new holder and takes ownership of the TFSA.
• Anyone else named, whether family, other people or organizations, is a designated beneficiary who receives the account's value rather than taking over the account.
• If no successor holder or beneficiary is named, the assets are directed to the deceased holder's estate and the will governs distribution.

Where a successor holder takes over, the deceased is not considered to receive an amount from the TFSA on death, so the account continues as a TFSA with its tax-free status intact.

When tax can still apply

An excess amount is the main way the deceased's own final tax position is affected. The legal representative files Form RC243 and Schedule A (RC243-SCH-A). How the estate itself is taxed on an estate-held TFSA can depend on the facts, so ask an accountant.

Special cases executors meet

If a qualified donee, such as a registered charity, is named as beneficiary, funds generally must be transferred within 36 months of death. The executor may then ask the CRA to amend the deceased's return to claim the donation credit.

A surviving spouse or common-law partner who receives TFSA payments as a beneficiary can contribute them to their own TFSA as an exempt contribution that does not affect their room. This requires contributing by December 31 of the year following death, staying within the fair market value at death, and sending Form RC240 within 30 days of the contribution unless the CRA allows a later date. It is not available where there was an excess amount or where more than one survivor receives payments.

Quebec does not recognize the successor holder designation for TFSAs, though a Quebec surviving spouse can still make an exempt contribution.

What to do next

• Find the TFSA contract and any designation, and compare it with the will.
• Ask the issuer for the account value at the date of death.
• Ask the issuer whether the account is a deposit, annuity or trust TFSA, since the tax treatment after death differs.
• Check whether the deceased had an excess TFSA amount.
• If a surviving spouse is receiving the money, diarize the December 31 and 30-day dates.
• Confirm with a lawyer or accountant how provincial rules, including whether the account passes through probate, affect your estate.

Keep copies of every statement and slip the issuer provides, since you may need them for later returns.

Frequently asked questions