TFSA Beneficiary vs. Successor Holder
The Tax-Free Savings Account (TFSA) is a popular financial tool in Canada, allowing you to grow your savings without incurring taxes on earnings. However, understanding how your TFSA will be managed and distributed after your dealth is crucial for effective estate planning.
Two critical designations within a TFSA are “beneficiary” and “successor holder.” Though they might sound similar, they have distinct implications for how your TFSA assets will be handled.
To make informed decisions about your estate planning, it's important to understand the key differences between a TFSA beneficiary and a TFSA successor holder.
TFSA Beneficiary
The beneficiary of a TFSA is a person or entity designated to receive the assets of a tax-free savings account upon the account holder’s death. Beneficiaries can be family members, friends, or charities, and the account holder can specify the percentage of the assets each beneficiary will receive if there are multiple beneficiaries.
Account and assets: As a TFSA beneficiary, you receive funds or investments from the TFSA as a lump sum. You do not manage the TFSA account or make investment decisions.
Tax implications: The TFSA funds you inherit are not taxed. This applies to any interest, dividends, or capital gains that were earned in the TFSA. Withdrawals from the TFSA after you inherit it are also tax-free.
Contribution room: You do not gain additional TFSA contribution room from the TFSA you inherit. Your personal contribution limits remain unchanged.
TFSA Successor Holder
A successor holder is appointed by the TFSA account holder to take over the management of the TFSA upon the account holder’s death. Typically, a successor holder is a spouse or common-law partner of the TFSA account holder.
Account and assets: As a successor holder, you inherit the TFSA account itself. This role allows you to manage accounts, make investment decisions, and continue contributions.
Tax implications: There are no taxes on the TFSA funds you inherit as a successor holder. The TFSA’s tax-free status is maintained, meaning that any earnings, interest, dividends, or capital gains within the TFSA remain tax-free.
Contribution room: You can make new contributions to the TFSA, but these contributions are subject to your annual TFSA contribution limits, not the deceased’s.
Withdrawals: You can withdraw funds from the TFSA anytime; these withdrawals are tax-free.
The difference between successor holder and beneficiary
Beneficiary | Successor Holder | |
Account and assets | Receives the TFSA funds or assets as a lump sum. | Inherits and manages the TFSA account. |
Tax implication | Inherited funds or assets, tax-free. | Inherited funds or assets, tax-free. |
Contribution Room | Unchanged. | Contributions are subject to your own annual TFSA contribution limits. |
Withdrawals | Tax-Free withdrawals of inherited funds. | Tax-free and growth from the TFSA. |
Investment Earnings | No taxes on earnings up to the date of death. | Earnings, interest, dividends, and capital gains grow tax free after inheriting the TFSA. |
It is crucial to understand that only spouses or common-law partners can be appointed successor holders for a TFSA. In contrast, children, siblings, and friends can only be named as beneficiaries. However, if a spouse or common-law partner is named as a beneficiary, they have a one-time opportunity to change their designation to successor holder. This change must be made before December 31 of the year following the account holder’s death to avoid taxes on any investment gains earned during that period.
It is best practice to designate spouses or common-law partners as successor holders from the outset to prevent potential taxation issues and ensure a smooth transfer of assets.
