Tax Free Savings Accounts (“TFSA”) – Beneficiary Designations

TFSA’s have now been around since 2009.  If you have not made any contributions before, as of 2016 you can contribute a maximum of $46,500, and each year after 2016 you will be able to contribute an additional $5,500 (the annual contribution amount being subject to indexation).

Any income and capital gains in your TFSA are tax-free to you, so a TFSA should certainly be part of your overall savings portfolio.

Like registered retirement savings plans (“RRSP”), you have the ability to designate a beneficiary on your TFSA.  Unlike RRSP’s, 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 to 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 of no designation made, the default on your death is your TFSA gets paid to your Estate.

Here are the income tax and probate fee differences between the designations:

  1. 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 date of death – fully taxable to Estate as income
  • Subject to BC probate fees – yes

 

  1. 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 date of death – fully taxable to individuals and/or spouse as income
  • Subject to BC probate fees – no

 

  1. Spouse designated as Successor Holder:
  • Tax on any increase in value up to date of death - none
  • Tax on any increase in value after 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, they step into your shoes as owner of your TFSA, effectively doubling the amount of TFSA that continues to grow tax-free.  If you only designate your spouse as 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 Chartered Professional Accountant or financial institution. You can get more information at: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/dth/menu-eng.html

Make the most of your Tax Return

Filling in canadian individual tax form T1 for year 2013It’s that time of year again…tax time! But this doesn’t have to mean stress, or any last minute gathering of receipts. Don’t wait until April to take a look at what you will need for your tax return, early planning can make this year’s taxes simple and help you make the most out of your return.

This article takes an important perspective: “taxes are a year-round activity,” and provides some helpful tips on where to get started when looking at which credits and deductions will benefit you this year. Keep in mind family members and friends when reading this article as well, as they may appreciate the information.

Happy tax season!

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