What is the difference between a beneficiary and a successor holder?
A beneficiary inherits the money while a holder inherits the account.
“Only a spouse or common-law partner can be a successor holder,” explains Melanie Adams, advisor at Sun Life Financial1. “On the other hand, anyone can be named beneficiary. According to her, people who have an advisor are aware of these two options. But, for those who open a TFSA themselves online, that may not be the case.
If you want your spouse or common-law partner to inherit your money, you need to know your options. Your choice may result in additional taxes.
“The TFSA contribution limit is increasing, as are the amounts saved. This tool may present a tax planning issue,” says Ms Adams. The current cap is set at $6,000. Suppose you are eligible for the maximum amount authorized since the creation of the TFSA in 2009. We are then talking about a sum of $63,500 in your TFSA, in addition to the investment income obtained.
The most straightforward choice: naming your spouse as the successor holder of your TFSA
As successor holder, your spouse or common-law partner becomes the new holder of your TFSA upon your death. This is regardless of the amount of unused contribution room in his plan. “The assets of [your TFSA] will therefore be transferred to the TFSA of your spouse or common-law partner, without reducing their unused contribution room,” says Ms Adams.
The successor holder thus becomes the new owner of the TFSA, and the latter retains its status as a tax-free savings instrument. This situation also avoids probate fees since the assets of the TFSA are not part of your estate; it is transferred directly to your spouse or common-law partner. The successor holder can keep the two accounts separately or combine their assets in a single charge.
Important note: The most straightforward choice is not always the best. It’s usually a good idea to name your spouse as the successor holder. It may be more appropriate to designate a beneficiary in certain circumstances and for certain types of investments (such as those with a guaranteed death benefit). Speak to your advisor.
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The most common choice: designate your spouse or common-law partner as beneficiary
IMPORTANT NOTE: This choice is possible everywhere in Canada except in Quebec.
You can designate your spouse or common-law partner as the beneficiary of your TFSA and not as the successor holder. This way, your money can still be transferred to your spouse’s or common-law partner’s TFSA without reducing their contribution room. Your spouse or de facto spouse can make the transfer no later than the end of the year following the year of your death. At that time, “he will have to complete the Canada Revenue Agency (CRA) form RC240, which allows the survivor to determine the maximum amount he can designate as an exempt contribution,” explains Ms Adams. By doing so, he will not have to pay tax on the amounts paid into his account. They must then send the completed form to the CRA within 30 days of transferring the assets from your TFSA to their account.
What happens if your spouse or common-law partner does not send Form RC240 to the CRA on time? The money in your TFSA will still be transferred as long as the transfer was completed within the prescribed time frame. What if he doesn’t have enough unused rights? He will have to pay the penalty equal to 1% per month of the excess contributions. If your spouse has no more contribution room and your TFSA is in the six figures, the penalty will be significant. His contribution room will have been wasted.
The most complex choice: designating someone other than your spouse or common-law partner as beneficiary
What if you don’t have a spouse or common-law partner? Your children or siblings are named non-spouse or common-law partner beneficiaries of your TFSA. They do not have the option of completing the CRA’s RC240 form. Upon your death, your account will no longer be considered a TFSA. However, all investment income accrued up to your date of death will remain tax-free. The money can be transferred to your beneficiary’s TFSA if he has enough unused contribution room. Any amount that your beneficiary is unable or unwilling to move to their TFSA will be treated as money in a bank account. Your beneficiaries will also have to pay tax on any investment income accumulated in your TFSA after your death.
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