TFSA With a Named Non-Spouse Beneficiary: What Happens in Canada

If a parent, relative or friend named you as the beneficiary of their TFSA, you may be wondering whether the money is taxable, how you will actually receive it, and whether you can move it into your own TFSA.

The rules treat a surviving spouse or common-law partner very differently from everyone else. This article focuses on the non-spouse case, such as an adult child, sibling, friend or charity.

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

Beneficiary versus successor holder

Only a surviving spouse or common-law partner can be a successor holder, and a successor holder takes over the account itself. Anyone else named, including family, other people and organizations, is a designated beneficiary. A designated beneficiary receives the account's value rather than taking over the account.

A common-law partner 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. If you do not fit that description, you are a beneficiary rather than a successor holder.

If the holder named nobody, the TFSA assets are directed to the estate and the will governs distribution. A holder who wants to change a designation contacts their TFSA issuer.

How the tax works for you

Beneficiaries generally pay no tax on amounts up to the TFSA's fair market value at the date of death. That amount passes tax-free, with no reporting required for it. 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 value. Earnings made after the date of death and before the estate is settled are taxable. How they are reported depends on the type of account:

• Deposit or annuity TFSA: the account stops being a TFSA on death, all earnings after death are taxable to the beneficiary, and interest is reported on a T5.
• Trust-governed TFSA: income earned during the exempt period and paid to beneficiaries is taxable to them, and payments above the value at death appear in box 134 of the T4A.
• Non-resident beneficiary: taxable trust payments are reported on an NR4, and the issuer must withhold and remit non-resident withholding tax.

Can you put the money into your own TFSA?

This is where the non-spouse case differs most. A surviving spouse can sometimes make an exempt contribution that does not use their own room. A non-survivor beneficiary, such as a child, may contribute the amounts received to their own TFSA only if they have available room, and they cannot designate any amount as an exempt contribution.

Over-contributing is taxed at 1% per month while the excess remains. So before depositing an inheritance into your TFSA, check your available room with the CRA. If you have several TFSAs, room applies to all of them collectively.

Also remember that a successor holder does not gain the deceased's unused contribution room. The information available points only to your own available room as the limit for a non-spouse beneficiary.

Charities named as beneficiary

If a qualified donee, such as a registered charity, is named as beneficiary, the 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. Because this adds steps and timing rules, it is worth confirming the details with an accountant.

What to do next

• Ask the issuer to confirm that you are the named beneficiary and request a statement showing the value at the date of death.
• Ask whether the account was a deposit, annuity or trust, and which slips to expect.
• Keep a record of the date of death value, the date you are paid and any earnings after death.
• Check your available TFSA room with the CRA before contributing any of the money to your own TFSA.
• Ask an accountant how post-death earnings should be reported, especially if the estate is slow to settle.

Frequently asked questions