What Happens to a TFSA When the Account Holder Dies in Canada?

A TFSA is usually tax-free during life, so families often assume nothing changes at death. In many cases the date-of-death value stays tax-free, but what happens next depends on who is named and how the account is set up.

This article covers successor holders, growth after death, contribution room and the main exceptions. It also touches on the filing and clearance steps the person handling the estate may need to think about alongside the account.

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

The basic rule at death

A TFSA holder is generally treated as receiving, immediately before death, an amount equal to the fair market value of the TFSA property, except where a surviving spouse or common-law partner is named successor holder, in which case the deceased is not considered to have received an amount from the TFSA. No TFSA income is reported on the final return.

Earnings after death on an annuity-contract TFSA are taxable to the beneficiaries when received. Post-death investment earnings that were in a TFSA may need reporting on the T3.

This is different from an unmatured RRSP, where the annuitant is treated as receiving the plan's full fair market value just before death and that amount is included on the final return. With a TFSA, the deemed receipt does not create TFSA income on the final return.

Successor holder or beneficiary

A surviving spouse or common-law partner named successor holder, in the contract or the will, becomes the holder immediately. The date-of-death value and later income stay tax-sheltered, and the deceased is not considered to have received an amount from the TFSA.

A designated beneficiary who is not a successor holder receives the property. If there is no beneficiary, the TFSA goes to the estate.

Because the result depends on who is named and where the naming is recorded, it helps to find the account contract and the will early.

Contribution room

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.

If the deceased's 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.

The Quebec exception

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.

Filing and clearance points for the estate

The TFSA is only one part of the estate's tax picture. For a death from January 1 to October 31, the final return and any balance owing are due April 30 of the year following the death. For a death from November 1 to December 31, the final return is due 6 months after the date of death.

If the deceased or a spouse or common-law partner living with them carried on a business on the date of death, the filing due date is June 15 of the following year for deaths from January 1 to December 15, and 6 months after death for deaths from December 16 to December 31. The payment due date does not change for business income.

The T3 return is due 90 days after the trust's year-end. A late T3 return can attract an alternative penalty of $25 per day, with a minimum of $100 and a maximum of $2,500, even when no balance is owing.

A legal representative must obtain a clearance certificate from the Minister before distributing property under their control. Without it, the representative is personally liable for those amounts to the extent of the value of property distributed. The certificate is requested on Form TX19 and issued on Form TX21. A new certificate is not required before each distribution as long as enough property is retained to cover any potential liability.

What to do next

• Ask the financial institution whether a successor holder or beneficiary is named.
• Get the date-of-death value in writing.
• Ask whether the account had any excess amount.
• Note any earnings after death, which may need to go on the T3.
• If the survivor is in Quebec, note the December 31 and 30-day deadlines.
• Before the estate distributes property, deal with the clearance certificate.

Who is named, and whether the account holds an annuity contract, can change the outcome. A lawyer or accountant can confirm how the rules apply to your situation.

Frequently asked questions