Tax Free Savings Accounts and Beneficiary Designations
Starting last week, any resident of Canada over the age of 18 with a valid social insurance number can open up a tax-free savings account (TFSA) and make a contribution of up to $5,000 a year. Income earned inside a TFSA is not taxable and money can be withdrawn tax-free at any time. Click here to read a National Post article on TFSAs and what type of assets can be held within a TFSA.
When TFSAs were first introduced in the Federal Government’s 2008 budget, there were concerns with how TFSAs would be treated upon the death of the account holder. TFSAs allow account holders to name a spouse or a common law partner as a “successor account holder” to allow the successor account holder to maintain the TFSA of the deceased without a reduction in their own contributions. Upon death, the value of the TFSA is not included in income but any income that accrues after death is subject to tax.
However, the federal government likely lacks the jurisdiction to give effect to successor account holder designations without also be named in testamentary documents and requiring probate. Beneficiary designations to allow assets to pass outside of probate are within the domain of provincial jurisdiction and the provincial legislation needs to be amended to allow for TFSA designations similar to RRSP beneficiary designations.
Currently, many Ontario financial institutions are providing for both a beneficiary designation and successor account holder be named when a TFSA is opened. The big unanswered question is if probate will be required or if a TFSA is an asset that passes outside of the estate.
Once the issue of beneficiary designations is settled, TFSAs may become another estate planning tool.
Have a great day,
Diane Vieira
