How Is TFSA Growth After Death Taxed in Canada Before Payout?

When a TFSA holder dies, the payout is often not immediate. Investments keep earning interest, dividends or gains in the meantime, and you may wonder whether that growth is still tax-free.

The short answer is that the value at death passes tax-free, but growth afterwards is treated differently. How, exactly, depends on who receives the account and what kind of TFSA it is.

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

The value at death is the tax-free anchor

Beneficiaries generally pay no tax on amounts up to the TFSA's fair market value (FMV) at the date of death, and no reporting is 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.

Earnings made after the date of death and before the estate is settled are taxable, since the tax-free part is limited to the FMV at death.

When a successor holder takes over

If the account goes to a successor holder, the delay matters far less. The successor is the surviving spouse or common-law partner named in the contract or will, and they immediately become the new holder. 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.

Growth therefore stays inside a TFSA. Quebec is an exception, because it does not recognize the successor holder designation for TFSAs.

When there is no successor holder

Anyone other than a successor holder named in the contract or will is a designated beneficiary, who receives the account's value rather than taking over the account. If nobody is named, the TFSA assets go to the deceased holder's estate and the will governs distribution.

What happens to growth then depends on the type of account:

The exempt period for a trust ends at the earlier of the end of the year following the year of death or when the trust ceases to exist. Payments above the FMV at death appear in box 134 of the T4A. Issuers report taxable payments to Canadian-resident beneficiaries on a T4A with no withholding required. For non-resident beneficiaries, the report is an NR4 and the issuer must withhold and remit non-resident withholding tax.

If the trust outlasts the exempt period

A trust TFSA that still exists after the exempt period becomes a taxable trust. It must file a T3 Trust Income Tax and Information Return (T3RET) every tax year it continues, and issue T3 slips for taxable distributions. Its first taxable year after the exempt period includes post-death income or gains not paid out during the exempt period. This is a reason to avoid leaving payout unresolved for long.

Reducing the tax and what to do next

A survivor who receives TFSA payments as beneficiary can contribute them to their own TFSA as an exempt contribution that does not affect their own contribution room. The contribution must be received and made during the rollover period, from death to the end of the calendar year after the year of death, and total no more than the FMV at death. Starting January 1, 2026, earnings accrued after death, up to the end of the rollover period, can also be designated as exempt contributions. This rule is recent, so confirm the current CRA wording.

The survivor sends Form RC240 (Designation of an Exempt Contribution – TFSA) to the CRA within 30 days of making the contribution, unless the CRA allows a later date. No exempt contribution is possible if the deceased's TFSA had an excess TFSA amount, or if payments are received by more than one survivor. A beneficiary who is not a survivor cannot designate any amount as exempt.

• Ask the issuer what type of TFSA it is and whether a successor holder or beneficiary is on file.
• Get the FMV at the date of death in writing.
• Track how much growth has accrued since death.
• If you are a surviving spouse or partner, decide on an exempt contribution before the rollover period ends.
• Check your slips (T4A, T5 or T3) against the amounts you actually received.

A lawyer or accountant can confirm how your situation is treated.

Frequently asked questions