As an owner of a TFSA, it is surely important for you to know what occurs with the money you have invested that remains in your account after your death. In this article, we will address frequently asked questions about the TFSA in Quebec. Among other things, we will explain what happens to your TFSA after your death, how to include it in your will and how it is transferred to your estate.
What is a TFSA?
A TFSA (Tax-Free Savings Account) is an account registered with the Canada Revenue Agency that allows you to earn investment income tax-free. Interest and investment income earned in a TFSA is not taxable at either the federal or provincial level.
What are the differences between an RRSP and a TFSA?
Contributions to a TFSA are not tax-deductible, unlike an RRSP. However, earnings on investments and withdrawals from a TFSA are not taxable at either the federal or provincial level.
Who can contribute to a TFSA?
To contribute to an Épargne Placements Québec TFSA, you must be a resident of Quebec, be at least 18 years old and have a valid social insurance number. There is no age limit to contribute to a TFSA.
Are there any restrictions on withdrawals from a TFSA?
No, you can withdraw any amount. However, you must respect the characteristics of the type of TFSA you have. It is important to note that withdrawing funds from your TFSA does not reduce the total amount of contributions made for the year.
Can I hold a TFSA at more than one financial institution?
Yes, it is possible to hold a TFSA at more than one financial institution, as long as the $6,000 annual contribution room limit is respected.
What happens to the TFSA when the holder dies?
In Quebec, it is not possible to assign a beneficiary to registered accounts (TFSA, RRSP, RESP, RRIF); these must be left as a specific gift if you want them to go to a specific person. Willful allows you to do this in the particular legacy section of our platform. Otherwise, they will simply pass through your estate like the rest of your assets. This also applies to spouses. Note that if you leave the contents of a registered savings account or retirement fund to a spouse who intends to cash it in without taking advantage of the spousal transfer clause, the estate will have to pay the applicable taxes.
As with other registered savings or retirement plans transmission of the TFSA is done with a will. It is necessary to write one of the following formulations on your will :
- I bequeath my TFSA to my spouse, if you want to make a specific bequest
- I leave all my assets to my spouse
- I leave a percentage of my assets to my spouse (example: 25% or 50%)
In the last two cases, the TFSA will be attributed to the spouse in his or her share of the inheritance, as it is considered one of the deceased spouse's assets. To leave the TFSA to someone other than your spouse, use wording similar to:
- I bequeath all assets in my TFSA to this person
Who inherits the TFSA?
If your spouse is named as a legatee in your will
If your spouse is named as a legatee in your will, upon your death, your spouse will be able to contribute to his or her own TFSA without affecting his or her unused contribution room. This is called a spousal rollover or exempt contribution. This allows your spouse to put the inherited TFSA into their own TFSA without affecting their contribution room.
There are two conditions to this:
- The payment must be made on or before December 31 of the year following your death
- Within 30 days of the date of the TFSA contribution, your surviving spouse must send the Designation of an Exempt Survivor Contribution to a Tax-Free Savings Account (TFSA) form to the Canada Revenue Agency
If you have not named your spouse as the legatee of your TFSA
If you have not named your spouse as the legatee of your TFSA, upon your death, your account will cease to be a TFSA. The money in your account can then be divided among your heirs, according to the terms of your will. Your heirs will then be able to use their inheritance to contribute to their TFSA according to their own available contribution room.
Is a TFSA taxable at death?
No, money accumulated in the TFSA prior to death is tax-free when it becomes available to the estate. However, the money accumulated between the time of death and the closing of the TFSA account is taxable to the legatees.
An example: Let’s say Jane had $100,000 in her TFSA when she died. When her account was closed a few months after her death, its value was now $110,000 due to gains on securities and dividends. This 10,000 growth in value will be taxable as ordinary income.
Does the TFSA need to be closed quickly after death?
It is the role of the liquidator to close the TFSA so that the money in it can be transferred to the estate or to the person named in your will. It's best to close it as soon as possible, considering that after death, the TFSA may continue to accumulate taxable capital gains (such as gains on securities, interest or dividends).