Having a Tax-Free Savings Account is a great way to invest and earn interest income. However, as with other investment vehicles, there are some tax implications in case of sudden demise of the owner.
Here's a short video explaining some of the more important points.
Keep the following in mind. If you have any doubts, don't hesitate to ask your accountant or CPA for advice.
1. Successor Holder
If your spouse or common-law partner is named on the TFSA as a Successor Holder then the TFSA does not terminate and the Successor Holder becomes the new account holder.
In this case, the new account holder does not get any tax consequences.
Remember, that in case the original holder over-contributed to the account before their death, the new account holder can absorb this over-contribution thus eliminating any potential future over-contribution penalties.
2. Rollover Period
If a spouse or common-law partner is not designated as a Successor Holder but is named in a will which includes the TFSA, then the deceased's TFSA can be transferred to their TFSA within a period of time called the Rollover Period.
This period starts at the date of death until the 31st of December of the following year. During this time the investment income is protected from income tax.
It is possible for the beneficiary to transfer the funds during the Rollover Period. In this situation the amount of transfer is limited to the Fair Market Value (FMV) of the TFSA at the time of death of the original holder.
3. Named Beneficiary
If the original account holder dies without a spouse or common-law partner as the named successor then the TFSA is collapsed at the date of death.
The TFSA can be transferred to the Named Beneficiary tax-free but only up to the FMV of the TFSA at the time of death. Here the beneficiary will need to have TFSA room to absorb the FMV transfer.
Any remaining assets can be received without any tax on the transfer but future income and capital gains on those funds would be taxable for the beneficiary.
4. Form RC 240
When an exempt contribution of the deceased’s TFSA is made to the beneficiary’s TFSA, then the beneficiary has 30 days from the date of contribution to fill in Form RC 240. This form is titled as Designation of an Exempt Contribution Tax-Free Savings Account.
Make sure that your CPA knows about your TFSA so that in case of your untimely demise, they can assist the successor holders or beneficiaries.
If you need more information about your TFSA then feel free to contact the team at Syed A.Raza Professional Corp. We can assist you in a wide range of matters including tax planning, audits, compilations and payroll.