Learn about the different kinds of TFSA beneficiary designations and what's right for your account
With the lifetime contribution amount now totaling $75,000 in 2021 (for those eligible since 2009), the Tax Free Savings Account (TFSA) has become a significant investment vehicle. If it will play a substantial role in your estate plan, understanding the impact of naming different beneficiaries is important.
While any income or capital gains earned in the TFSA to the date of death are exempt from tax, keep in mind that the way that beneficiaries are names and structured may have different financial implications. If you haven't revisited your TFSA beneficiary designations since opening the account, perhaps now is a good time to review them. Here are some things to consider:
Decide "Where" to Designate a Beneficiary - in all Provinces (except Quebec), you may designate a beneficiary of your TFSA by naming them in the plan documentation or in your Will. If a beneficiary is designated within the TFSA plan documentation, you benefit by minimizing probate taxes as the value of the TFSA will generally not pass within the Estate.
If Naming a Spouse, Consider Designating as Successor Holder - this designation is only available to spouses, and allows the spouse to automatically become the holder of the TFSA at your death simply through a name change on the account. If the spouse already has their own TFSA, they will now have two accounts and can choose to consolidate them without affecting their own TFSA contribution room. If the spouse only designated as a Beneficiary, any increase in the value of the TFSA after the deceased's date of death will be subject to taxes.
If Naming a Minor Beneficiary - make sure you are familiar with Provincial laws as proceeds will generally need to be paid to a parent on behalf of the minor child, a court-appointed guardian of property or an appointed trustee (like a testamentary trust created under a Will for the benefit of a minor). If no trustee is named, the proceeds could be paid into the courts, which can be costly and time-consuming.
Designating a Charity - If you wish to make a gift to a charity as part of your Estate plan and are seeking opportunities to minimize the taxes paid by your estate, consider designating a charity as a beneficiary of a registered plan. With the TFSA, any value on the date of passing would not be considered as taxable income. However, the full value of the RRSP or RRIF would be generally considered taxable income in the year of passing (unless there is a successor). A charitable donation tax credit can be used to reduce taxes payable in the year of death.