What Happens to a TFSA When the Owner Dies in Canada?

A family member has died and left a Tax-Free Savings Account. You want to know whether the balance is taxed, who gets it, and what happens to the growth while the estate is being settled.

The answer turns mainly on one question: was the survivor named as a successor holder, or only as a beneficiary? The two lead to different results, and the paperwork names matter.

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

How a TFSA is treated at death

A TFSA holder is treated as receiving, immediately before death, an amount equal to the fair market value of the TFSA property. Even so, no TFSA income is reported on the final return.

So the value at death is not taxed to the deceased. What happens afterwards depends on who receives the account and on how the plan was set up.

Successor holder or beneficiary

A successor holder's own contribution room is not affected by becoming successor holder, unless the deceased's TFSA had an excess amount. They also do not gain the deceased's unused room.

Growth after death

If the survivor is a successor holder, later income stays tax-sheltered. If the account passes to a beneficiary or the estate instead, the position is different. Earnings after death on an annuity-contract TFSA are taxable to the beneficiaries when received, and post-death investment earnings that were in a TFSA may need to be reported on the T3.

This is a common surprise for families. The date-of-death value is not taxed on the final return, but growth during a long estate administration may not stay sheltered if no successor holder is in place. Getting the paperwork settled promptly can limit that effect.

Special situations

• Quebec does not recognize successor holder designations. A survivor there can make an exempt contribution to their own TFSA by December 31 of the year after the year of death and file Form RC240 within 30 days of the contribution, without affecting their contribution room.
• If the TFSA had an excess amount at death, it is taxed at 1% per month through the month of death, and the legal representative files Form RC243.
• A successor holder is deemed to contribute any excess at the start of the month after death.

What to do next

• Ask the financial institution for the TFSA contract and the beneficiary or successor holder designation on file.
• Check the will for any successor holder wording.
• Get the date-of-death value of the account in writing.
• Find out whether the account had an excess amount, and if so file Form RC243 as legal representative.
• Watch for post-death earnings that may need to be reported on the T3.

If the designations are unclear or conflict with the will, a lawyer or accountant can help you sort out who receives the account and how to report it.

Frequently asked questions