Over-Contributed TFSA at Death: Penalty Tax Explained in Canada

Going through a deceased person's records, you may find that their TFSA held more than the contribution rules allowed. An excess amount can carry a monthly tax, and as executor you may be the one who has to deal with it.

This article explains in general terms how the 1% monthly tax works at death, who is responsible, and how an excess can affect a surviving spouse or other beneficiaries.

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

What an excess amount means at death

An excess TFSA amount, in plain words, is money held in a TFSA beyond what the holder was allowed to contribute. An excess can also affect a surviving spouse or other beneficiaries, as the table below shows. Death does not erase it. The deceased's excess amount is taxable to the deceased at 1% per month for each month it stays in the account, up to and including the month of death.

So the tax runs through the month in which the person died. How the excess is treated for any later months depends on the facts, so that is worth raising with an accountant or the issuer.

Who pays and who files

The tax is the deceased's, which means it is a matter for the legal representative, usually the executor. The legal representative files Form RC243 and Schedule A (RC243-SCH-A). How the tax fits with the estate's other obligations depends on the estate, so it is worth confirming with a lawyer. If no successor holder or beneficiary was named, the TFSA assets are directed to the deceased holder's estate and the will governs distribution.

• Form RC243 is the return used to report the excess.
• Schedule A (RC243-SCH-A) accompanies it.
• The rate is 1% per month, counted for each month the excess stays in the account.

How an excess affects the people who receive the account

An excess can also carry consequences for the surviving spouse or common-law partner. The table sets out the main ones.

A successor holder generally keeps their own contribution room unaffected if the deceased had no excess. Where there is an excess, that protection does not apply in the same way, which is why a spouse in this position should check their own room carefully. The successor holder must also have a valid social insurance number or individual tax number.

Practical ways to approach it

Before you file anything, you need accurate numbers: how much was in the account, what the allowed room was and how long any excess stayed there. The issuer's statements and the CRA's records of contribution room are the usual starting points. Be careful about estimating, because the tax is counted by month.

How to remove an excess from the account, and the timing of any removal, depends on the facts and on the issuer's processes. Ask an accountant or lawyer before moving money, particularly if a successor holder or a beneficiary is involved.

What to do next

• Gather all TFSA statements and contribution and withdrawal records for the deceased.
• Confirm with the issuer the fair market value of the account at the date of death, since amounts up to that value generally pass tax-free to beneficiaries.
• Work out which months the excess stayed in the account, up to and including the month of death.
• Prepare Form RC243 and Schedule A (RC243-SCH-A).
• Raise the excess with an accountant before any surviving spouse or beneficiary contributes inherited funds elsewhere, since where the account had an excess the exempt contribution limit is nil or a greater amount the Minister allows.
• Get advice from an accountant or lawyer before distributing the estate.

Frequently asked questions