The TFSA is a useful investment tool to avoid paying taxes on investment returns. However, depending on how the estate of the account holder is setup, there may be tax implications on income earned on funds in a TFSA after the account holder dies.

What happens when a TFSA holder dies?

Depending on the marital status/will/decision of the account holder, there are different options available:

Designated Beneficiary

Anyone can be designated as a beneficiary to a TFSA after the account holder dies. The beneficiary may be a survivor, former spouses, common-law partners, children, friends, etc.

Generally, if a beneficiary is designated, the TFSA is collapsed after death and the funds are disbursed as cash to the beneficiary. Any income earned on the account between the date of death and date of transfer to the beneficiary is taxable.

Example 1: Daisy, a TFSA holder, died with a TFSA valued at $50,000 at the time of her death. Daisy’s only child, Daniel, was named beneficiary by way of her will. At the time the estate was settled and Daisy’s TFSA was closed, the account was valued at $55,000 (an increase of $5,000). As the beneficiary of Daisy’s estate, Daniel received $55,000 from Daisy’s TFSA and is expected to report the additional $5,000 as taxable income for the year.

Designating a TFSA Beneficiary

For a designated beneficiary who also qualifies as a survivor, there are further options.

Survivor: An individual who is, immediately before the TFSA holder’s death, a spouse or common-law partner of the holder.CRA

A beneficiary who is also a survivor is allowed to contribute the value of the TFSA at the time of death to their own TFSA without requiring or using their contribution room. This is also known as an “exempt contribution” and must occur by December 31st of the year following the death of the account holder. However, income earned on the TFSA after death is still taxable.

Example 2: Continuing from example 1 above, let’s now assume that Daniel is actually Daisy’s surviving husband and was designated as beneficiary in her will. Because he is considered a “survivor”, the amount paid to him is considered a survivor payment and he is able to roll over (contribute) the $50,000 to his TFSA without requiring contribution room i.e. an exempt contribution. If he has contribution room of up to $5,000, he can also contribute the excess $5,000 to his TFSA. However, the excess amount of $5,000 will still be considered as taxable income in the year he initially received it.

Successor Holder

Only your spouse or common-law partner can be designated as successor holder of your TFSA account. If you die, as successor holder, they acquire all the rights related to your account, the account stays open and there are no tax consequences. The successor holder essentially replaces you as the plan holder. Additionally, the successor holder doesn’t need to have TFSA contribution room to receive the benefit.

You can designate a spouse or common-law partner as a successor holder either in your TFSA contract or in your will.

Related: TFSA Over-Contribution: What are the Penalties?

Final Thoughts

Except for Quebec, all other provinces permit TFSA beneficiary designations as either a designated beneficiary or a successor holder. In Quebec, TFSA’s are included in the estate and subject to the will. Naming your spouse or common-law partner as successor holder is advantageous since there are no probate fees and nil tax implications.

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