What to do if you are the Beneficiary of a TFSA
If you are the beneficiary of a TFSA, there’s some things you need to know. Are you the successor holder or designated beneficiary? This matters since only successor holders can transfer the deceased holder’s TFSA funds to their own TFSA without having it count towards their own contribution limits (an “exempt contribution”). If you are not a successor holder but a designated beneficiary, then you can’t use the “exempt contribution” rule, and you have to follow the same contribution limits as everyone else.
If you are a Canadian resident but don’t have a valid SIN, then you need to get a valid SIN before you can take ownership of the TFSA. If you are a non-resident, then you have to get an individual tax number (ITN) before you can take ownership.
If you want your TFSA is to be transferred over to a qualified donee rather than an individual (eg. a registered charity of your choice), this needs to happen within 3 years of your death. Once this happens, your tax return can be adjusted to claim the charitable donation tax credit. If you go this route, make sure your estate’s executor knows to do this in order to get this extra tax credit!
What about contribution room?
Suddenly acquiring ownership of a deceased holder’s TFSA will not affect the unused contribution room of your own TFSA. The only exception is if the deceased holder had over-contributed to their own TFSA before death. In this case your own contribution room would be affected:
- By whatever amount the deceased holder was over on their own TFSA at the time of death (let’s say they went over their contribution limit by $1000), you inherit that same amount as an automatic contribution to your own TFSA (in other words, you are considered to have just contributed $1000 to your own TFSA).
- If you were close to your own personal limit when the death happened (eg. you were already at $5000 and the 2017 limit is $5500), you could become over as well (since your own $5000 + their $1000 = $6000, and the limit is only $5500). In this scenario you would get dinged the 1%-per-month penalty on that extra $500, until you withdrew it.
But, having two separate TFSA accounts may be confusing (and undesirable) for some. You may want to consolidate both accounts into one; simply ask your bank or brokerage firm to do a direct transfer (tell them it’s due to acquiring a deceased holder’s TFSA) in order to maintain your contribution room. Remember, if you transfer over the money yourself, it’s considered a regular transaction and will eat into your contribution room.