What Happens to your TFSA when you Die?
Depending on what type of TFSA you have, it may cease to exist as a TFSA, or be transferred to a beneficiary as a TFSA, or continue to exist for an exempt period before eventually losing its TFSA status. And if you neglect to name a successor holder or a designated beneficiary, then your TFSA will become part of your estate and be handled according to your will.
Types of beneficiaries
When setting up a TFSA, you should designate who is going to be the beneficiary (new holder) of your TFSA, regardless of what type you originally set up. Often this will be your spouse or common-law partner (= “successor holder”), but can also be a former spouse, your children, or a qualified donee such as a registered charity (= “designated beneficiary”). When you die, your TFSA issuer (your bank or brokerage firm) will notify the CRA that it is about to change ownership, according to whatever you stipulated in your will or TFSA contract.
If you don’t designate a successor holder
If you have a deposit or annuity-type TFSA, you die, and you neglected to designate a successor holder, your account ceases to exist as a tax-free investment vehicle (it’s no longer considered a TFSA). What this means is that any earnings made after your death are not tax-free, and your beneficiary (your estate, or whomever) will have to pay tax.
If you have an arrangement-in-trust-type TFSA, you die, and you neglected to designate a successor holder, your account will continue on with its tax-free status for the “exempt period”. This is the earlier of whenever the TFSA trust was due to expire, or the end of the next calendar year following your death. So for example, if you died in November 2014, the exempt period is until December 31, 2015, unless you specified earlier. After this time your TFSA loses it’s tax-free status and your beneficiary (your estate, or whomever) will have to pay tax. Note that any earnings made inside the TFSA after your death are taxable, only whatever was already in the TFSA at the time of your death remains tax-free.
So, in every case it’s to your advantage to designate a successor holder if you want ALL your hard-earned TFSA money to go to a loved one. Don’t leave this step out when setting up your TFSA, and if you marital relationship changes, make sure to change your beneficiaries to follow suit!