TFSA With a Named Beneficiary Who Is Not a Spouse: Canada

Being named as the beneficiary on someone's TFSA is a welcome surprise, but it raises practical questions. Do you pay tax on what you receive? Can you move the money into your own TFSA and keep it sheltered? The answers depend on who you are in relation to the deceased and how the account was set up.

This article explains, in general terms, how federal tax treats a TFSA left to a non-spouse beneficiary such as a child, sibling, friend or charity. It does not replace advice on your own situation, which is worth confirming with a lawyer or accountant.

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

Successor holder or designated beneficiary?

The most important question is whether you were named as a successor holder or as a beneficiary. A successor holder is the surviving spouse or common-law partner named in the TFSA contract or in the will. Anyone else, including family members, other people and organizations, is a designated beneficiary.

A designated beneficiary receives the account's value rather than taking over the account. That is the key difference from a spouse who becomes the new holder and keeps the TFSA going.

What is tax-free and what is taxed

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.

The tax-free part is limited to that FMV. Earnings made after the date of death and before the estate is settled are taxable. So if the account grows while the estate is being wrapped up, the growth is not covered by the original tax-free treatment.

How the taxable part shows up depends on the type of TFSA. For deposit or annuity TFSAs without a successor holder, the account stops being a TFSA on the holder's death, all earnings after death are taxable to the beneficiary, and interest is reported on a T5.

Trust-governed TFSAs and the exempt period

A trust-governed TFSA is treated differently. The trust keeps limited TFSA treatment during the exempt period, which ends at the earlier of the end of the year following the year of death or when the trust ceases to exist.

• Income earned during the exempt period and paid to beneficiaries is taxable income to them, and 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.
• If the beneficiary is a non-resident, the payments are reported on an NR4 and the issuer must withhold and remit non-resident withholding tax.
• If the trust still exists after the exempt period, it becomes a taxable trust and must file a T3 Trust Income Tax and Information Return every tax year it continues.

Can you keep the money sheltered?

A child or other non-survivor beneficiary may contribute the amounts received to their own TFSA only if they have available room. They cannot designate any amount as an exempt contribution. Exempt contributions are a route for a surviving spouse or common-law partner, not for other beneficiaries.

If you contribute more than your room allows, the excess is taxed at 1% per month while it remains. Before moving inherited funds, check your available room with the CRA and compare it with the amount you expect to receive.

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. If that describes the deceased's partner, different rules may apply to them.

Special cases: no beneficiary and charities

• If no successor holder or beneficiary is named, the TFSA assets are directed to the deceased holder's estate and the will governs distribution.
• If a qualified donee is named as beneficiary, funds generally must be transferred within 36 months of death, and the executor may then ask the CRA to amend the deceased's return to claim the donation credit.
• Whether a designation is valid depends on provincial or territorial law as well as the account contract, so a lawyer can confirm how it applies where you live.

What to do next

• Get a copy of the TFSA contract or issuer records showing who was named.
• Ask the issuer for the account's value on the date of death.
• Ask whether the account is a deposit, annuity or trust-governed TFSA, since reporting differs.
• Check your own available TFSA room before moving any money.
• Keep records of any growth after death, because it is taxable.
• Speak with an accountant or lawyer if the estate is large, if you live outside Canada, or if more than one person is named.

Frequently asked questions