What Happens to a TFSA When Someone Dies in Ontario?

A Tax-Free Savings Account can look simple until the account holder dies. Then you may be wondering whether the balance is taxed, who is entitled to it, and what the estate trustee has to report. The answers depend mostly on what the account paperwork says.

This article walks through the three common situations: a surviving spouse or common-law partner named as successor holder, a named beneficiary, and no designation at all. It also explains how a TFSA fits into Ontario's Estate Administration Tax.

How a TFSA is taxed at death

For tax purposes, the holder is considered to have received the account's fair market value immediately before death. Unlike an RRSP, though, no TFSA income is reported on the deceased's final return or on any optional return.

The tax-free treatment stops at the date of death in most cases. Earnings that build up after the death are taxable to the beneficiaries in the year they receive them. The main exception is a successor holder, covered below.

Three ways a TFSA can pass

The wording on the account contract matters. A spouse who is named as a beneficiary rather than as successor holder falls into the beneficiary group, not the successor holder group.

If a spouse is the successor holder

A surviving spouse or common-law partner named as successor holder in the TFSA contract or in the will takes ownership of the TFSA at death. Growth after death stays sheltered from tax, and the deceased is not considered to have received any amount.

Taking over the account does not affect the survivor's own contribution room, as long as the deceased's TFSA had no excess amount. If an excess amount existed, the result can differ, so it is worth checking with an accountant or lawyer.

If there is a beneficiary or the account goes to the estate

A family member, another person or an organization can be named as TFSA beneficiary. If neither a successor holder nor a beneficiary is named, the TFSA goes to the estate and is distributed under the will.

Amounts the estate allocates to beneficiaries are generally included in the beneficiaries' income and reported to them on T3 slips, while income the estate keeps is taxed in the estate. A T3 return is generally filed for an estate that realizes any gain or receives any payments after the death. Whether a return is needed in a particular estate depends on the facts, including whether the estate was distributed right away and earned no income.

• Ask the financial institution for the account value at the date of death and any growth since then.
• Keep records of when amounts were paid out, because earnings are taxed in the year they are received.
• Ask an accountant whether the estate needs to file a T3 return.

A survivor who is a TFSA beneficiary but not the successor holder may wonder whether the money can go into their own TFSA. CRA describes a special exempt-contribution route, with its own form and deadlines, for survivors in Quebec, which does not recognize successor holder designations. Whether any similar route applies to a survivor in Ontario depends on the facts, so it is worth confirming with a lawyer or accountant before relying on it. Because deadlines for steps like this can be short, it helps to raise the question early.

TFSAs and Ontario Estate Administration Tax

In Ontario, Estate Administration Tax is charged on the value of the estate when an estate certificate is applied for, and the estate pays it, not the estate representative. For estate certificates applied for on or after January 1, 2020, there is no tax on estates worth $50,000 or less, and $15 for each $1,000 or part of $1,000 over $50,000.

A TFSA with a beneficiary designation is left out of the estate value for this purpose. A TFSA with no designation is paid to the estate and distributed under the will, so it adds to the estate's value for this tax. That can make the way the account was set up a real cost difference, but the full picture depends on the other assets in the estate.

What to do next

• Get a copy of the death certificate and the TFSA contract or account application.
• Confirm in writing whether a successor holder, a beneficiary or no one was named.
• Ask for the date-of-death value and keep every statement after it.
• Do not report the TFSA value as income on the final return.
• If the TFSA is going to the estate, tell the person preparing the estate's tax and probate filings so it is counted properly.
• Before distributing estate property, remember the legal representative needs a clearance certificate from the Minister.

If the paperwork is unclear, if an excess amount may exist, or if family members disagree about who is entitled, speak to a lawyer or accountant before anything is paid out.

Frequently asked questions