Navigating Your Tax-Free Savings Account

Robert E. Flux
Insights
| 5/4/2020

TFSA’s have now been around since 2009. If you have not made any contributions before, as of 2020 you can contribute a maximum of $69,500, and each year after 2020 you will be able to contribute an additional $6,000 (the annual contribution amount being subject to indexation).

Like retirement savings plans (“RRSPs”), any income and capital gains in your TFSA are completely tax-free to you. Unlike RRSPs, contributions to your TFSA are NOT deductible on your personal income tax return, as well withdrawals from your TFSA are also NOT taxable on your personal income tax returns. So unlike RRSPs, there are no income tax considerations to consider with TFSAs.

Also, like RRSPs, you have the ability to designate a beneficiary on your TFSA. Unlike RRSPs, a TFSA has a third possible designation, the “successor holder,” which is still not well understood by many, and the differences in the designations can have a significant impact to your Estate. The only person that can be a “successor holder” is one’s spouse.

It should be mentioned that you may not have ANY TFSA beneficiary designation. In the case of a self-administered TFSA account (i.e. one you opened through an online brokerage), the default may be no designation until you file a “beneficiary designation form” to have one added to the account. Your beneficiary designation is typically shown on your investment statements, if not contact your financial institution to confirm your designation. In the case where no designation is made, the default on your death is your TFSA gets paid to your Estate. This may or may not be appropriate depending on your Estate goals.

Below are the income tax and probate fee differences between the designations.

No designation (default Estate) / Estate designated as beneficiary:

  • Tax on any increase in value up to date of death - none
  • Tax on any increase in value after the date of death – fully taxable to Estate as income
  • Subject to BC probate fees – yes

Specific individual and/or spouse designated as beneficiary:

  • Tax on any increase in value up to date of death - none
  • Tax on any increase in value after the date of death – fully taxable to individuals and/or spouse as income
  • Subject to BC probate fees – no

Spouse designated as Successor Holder:

  • Tax on any increase in value up to date of death - none
  • Tax on any increase in value after the date of death – none
  • Subject to BC probate fees – no

So if you have a spouse, you should ensure that they are designated as the successor holder of your TFSA. This ensures, on your death, that they step into your shoes as the owner of your TFSA, effectively doubling the amount of TFSA that continues to grow tax-free. If you only designate your spouse as the beneficiary, this is not the same as designating them as successor holder, because your TFSA will not continue to grow tax-free in their hands upon your death.

For more information, contact your Crowe MacKay LLP advisor or financial institution.

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Robert E. Flux
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