If a Non-Resident TFSA Holder Dies: Tax Rules in Canada

When someone who has left Canada dies and still holds a Tax-Free Savings Account (TFSA), the family often has two worries at once: what happens to the account, and whether the Canada Revenue Agency (CRA) will charge tax or penalties. The answers depend on how the account is set up and who receives the money.

This article explains the general federal rules on TFSAs at death and points out where the residence of the people involved can change the result. Details specific to a non-resident holder can turn on the facts, so treat this as a starting map and not a final answer.

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

Start with the designation on the account

The first question is who, if anyone, was named on the TFSA contract or in the will. A successor holder is the surviving spouse or common-law partner named in the contract or the will. On the holder's death they immediately become the new holder and take ownership of the TFSA.

Anyone else named, such as a child, another relative or an organization, is a designated beneficiary. A beneficiary receives the value of the account rather than taking over the account. If no successor holder or beneficiary is named, the TFSA assets go to the deceased holder's estate and the will governs how they are distributed.

A common-law partner, for these purposes, is a person who is not your spouse, with whom you are living in a conjugal relationship, and who meets a further condition, such as having lived with you for at least 12 continuous months or being the parent of your child.

When there is a successor holder

If a successor holder takes over, the deceased is not considered to receive an amount from the TFSA on death. The account continues as a TFSA with its tax-free status intact. The successor holder must have a valid social insurance number (SIN) or individual tax number (ITN).

Becoming a successor holder does not change the successor's own contribution room if the deceased had no excess amount, and the successor does not gain the deceased holder's unused room. Because designations are tied to provincial and territorial law, one exception matters: Quebec does not recognize the successor holder designation, although a Quebec surviving spouse can still make an exempt contribution.

Tax on the payout to beneficiaries

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, 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, because the tax-free part is limited to the FMV at death. Where the TFSA is a deposit or annuity and there is no successor holder, the account stops being a TFSA on the holder's death, and all earnings after death are taxable to the beneficiary.

For a trust-governed TFSA without a successor holder, the issuer reports taxable payments to Canadian-resident beneficiaries during the exempt period on a T4A, with no withholding required. The exception is the non-resident beneficiary: taxable trust payments to them are reported on an NR4, and the issuer must withhold and remit non-resident withholding tax. Whether a particular payment is taxable, and how any foreign tax rules apply to a beneficiary living abroad, is worth confirming with an accountant.

Excess amounts and penalties

The main penalty tax in the TFSA rules is the tax on excess amounts. If the deceased had an excess TFSA amount, it 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. The legal representative files Form RC243 and Schedule A (RC243-SCH-A).

An excess can also pass along. When a successor holder takes over an account that had an excess, the successor is treated as making a contribution equal to the excess on the first day of the month after death. If that creates an excess in the successor's accounts, it is taxed at 1% per month while it remains.

Whether a non-resident holder had an excess, and how long it stayed in the account, depends on the account history. This is a point where an accountant reviewing the statements is useful.

What to do next

• Find the TFSA contract and the will, and check for a named successor holder or beneficiary.
• Contact the TFSA issuer to report the death and ask how it will treat the account and any payments.
• Ask the issuer for the account's value at the date of death.
• Review past statements for contributions made while the holder was outside Canada, to look for any excess.
• Ask the legal representative to speak with an accountant about the final return and any Form RC243 filing.
• Beneficiaries living outside Canada should ask the issuer how withholding and an NR4 would apply.

Frequently asked questions