—Updated Jan. 16, 2018 to clarify TFSA rules for those who live in Quebec—
Q: My brother recently died and my sister-in-law is his beneficiary. We are unclear what happens with his TFSA, i.e. how can it be turned over ‘in kind’ to her if her TFSA is already maximized?
Wouldn’t it have to be cashed out for her to invest as she wishes, she just wouldn’t have to claim interest earned for that calendar year?
A: I’m sorry for your loss, Rosemary. It sounds like you may be acting informally to help your sister-in-law or formally as the executrix of your brother’s estate. Either way, your question is a good one and my answer is “it depends.” I’ll elaborate.
You mentioned that your sister-in-law is your brother’s beneficiary. We should clarify what you mean by that. If she is the “beneficiary” of his Tax-Free Savings Account (TFSA), his TFSA must be paid to her and only her, whether to her TFSA or to her directly. It can be transferred from his TFSA to her TFSA and could qualify as an “exempt contribution,” meaning it doesn’t impact her TFSA room.
To qualify, the TFSA to TFSA transfer must occur within the rollover period, by December 31 of the year after your brother died. Your sister-in-law must also complete Form RC240, Designation of an Exempt Contribution Tax-Free Savings Account (TFSA) within 30 days of the transfer.
Of note is that the exempt contribution amount is equal to the market value of your brother’s TFSA on his date of death, not necessarily the entire account value of his TFSA at the time of transfer. So, any excess value on the transfer date would impact your sister’s TFSA room, therefore, she should ensure it doesn’t cause her to overcontribute to her TFSA.
This incremental growth from the time of his death to the time of transfer would also be taxable to the beneficiary – your sister. Excess TFSA value beyond the market value at the time of your brother’s death would be considered a “Tax-Free Savings Account taxable amount” and reported on a T4A slip to be issued to your sister-in-law and taxable on her tax return in the year of payment. This amount is fully taxable as ordinary income, Rosemary, not as capital gains or any other form of income.
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Your brother may have appointed your sister-in-law as the “successor holder” for his TFSA, which is slightly different from appointing her as the “beneficiary.” In this case, the TFSA account continues to grow tax-free after your brother’s death and your sister-in-law literally takes over the TFSA account, even if it has grown afterwards. She could consolidate the account with her own TFSA with no restrictions, Rosemary. This is obviously the preferable option, so you need to clarify if she is the TFSA beneficiary or successor holder.
If your brother did not name her as the beneficiary or successor holder for his TFSA, the account would be payable to his estate. Your sister-in-law may still be the “beneficiary” of his estate, in which case, the TFSA would be co-mingled with all other assets passing through his estate. The estate could not make an exempt contribution to your sister-in-law’s TFSA, but would instead pay her the TFSA proceeds and any other eligible net proceeds from your brother-in-law’s estate directly.
If your sister-in-law was the TFSA beneficiary or successor holder, you may be able to transfer the TFSA investments ‘in kind’ or as is from one TFSA to another, Rosemary, but that will be up to the transferring and receiving financial institutions. Not all investments can be held in all TFSAs or one of the two may require the payment to be made in cash. Regardless, it won’t impact the tax treatment, whether you transfer investments in kind or transfer cash.
Even if your sister needs or wants to use the TFSA proceeds for something else, she should at least transfer the amount to her TFSA initially. If she then takes a withdrawal from her TFSA, even immediately, she will free up new TFSA room that she may decide to take advantage of again in the future.
One final point of clarification. I assume your husband was not a resident of Quebec when he died. For Quebec residents, neither TFSA successor holder nor beneficiary designations are allowed. Beneficiary designations can only be made by in your will (most common) or marriage contract (less common).
Good luck with settling your brother’s estate, Rosemary. Hopefully I’ve clarified the importance of determining exactly what kind of “beneficiary” your sister-in-law is for the purposes of your brother’s TFSA.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
MORE ABOUT TFSAs:
- How to make a spousal RRSP work for you
- How to build a $5,200 TFSA in a year
- Bring back the $10,000 TFSA
- How to shuffle a DIY portfolio to last to age 90
- Opening a TFSA at your bank
- Using your TFSA as a learning tool
- When ‘in-kind’ TFSA transfers don’t trigger a ‘deemed disposition’
- Building a TFSA doesn’t have to be complicated