The Death of a TFSA Holder... Now What?

When a Tax-Free Savings Account (TFSA) holder passes away, the handling of the account depends on whether the account has a named successor holder or a designated beneficiary. Here’s a breakdown of the main scenarios:

• Successor Holder (usually a spouse or common-law partner):
  • If the deceased TFSA holder has named their spouse or common-law partner as the "successor holder," the TFSA can be transferred directly to the successor’s TFSA without affecting their own TFSA contribution room. This allows the account to maintain its tax-free status, and any future income or growth in the TFSA remains sheltered from taxes. The successor holder essentially steps into the role of the original TFSA holder, and the account continues under their ownership.
• Designated Beneficiary (other than a spouse or common-law partner):
  • If the TFSA holder has named a non-spouse beneficiary, such as a child or friend, the account stops growing on a tax-free basis on the holder's death. The fair market value of the TFSA at the date of death can be paid to the beneficiary tax-free, but any income earned in the account after the holder’s death will be taxable to the beneficiary. The TFSA itself will be closed, and the funds are paid out to the beneficiary.
• No Successor Holder or Designated Beneficiary:
  • If there is no named successor holder or designated beneficiary, the TFSA is typically paid to the deceased’s estate. The fair market value at the date of death is still tax-free, but any income earned after death will be taxable to the estate or to the eventual inheritors, depending on how the estate is handled.

In all cases, the date of death determines the tax treatment, with any earnings generated after that date generally subject to tax unless a spouse is the successor holder.

Provincial legislation must also be taken into consideration as probate laws can enter into the situation based on the jurisdiction.

Contact our office to make sure your TFSA is in order.