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It matters how you designate a spouse on your TFSA should you die before they do. Successor holders get the best (and speediest) tax treatment.
I have a question about TFSAs that I have not seen being answered anywhere. My problem is as follows: In 2009, both my husband and myself started to make the total allowable contributions to our individual TFSA accounts. When my husband passed away in 2020 the balance in his TFSA at that time was “rolled over” into my personal TFSA (we had signed up for this possibility right in 2009). Since 2020, I have continued to make my maximum allowable contributions. My question is now: When my late husband’s TFSA balance was added to my own (I was his designated beneficiary), how did that affect my own lifetime allowable contribution limit? I’m beginning to think that I may have been over-contributing these last few years unwittingly, unless his accumulated contributions did not affect mine.
—Rolina
Rolina, I suspect you are in good shape and you have not overcontributed to your tax-free savings account (TFSA), but you may want to check with Canada Revenue Agency’s My Account service. (If you don’t already have a personal My Account portal, you can sign up for one for free.) When your husband’s TFSA was rolled into your TFSA, it was considered an exempt contribution, having no impact on your future contributions. This is significant because you will always have his earned TFSA room available to you.
You were able to roll his money into your TFSA either because of actions you took, which I will explain further down, or because your husband named you as a successor holder. The main designation options for TFSAs are beneficiary, successor holder, or estate.
Beneficiaries receive the value of the TFSA at the time of the owner’s death, tax-free. Investment growth between the time of death and the beneficiary’s receipt is taxable. Naming a beneficiary avoids probate by bypassing the estate, which expedites the time for the beneficiary to receive the proceeds of the TFSA. What a beneficiary designation does not do is allow for an exempt rollover into a surviving spouse’s TFSA.
If the estate is designated, the money will pass through the estate and be subject to probate. Plus, investment growth after the time of death will be taxable. There is no exempt automatic rollover into a surviving spouse’s TFSA, but it can be done with a little work and the proper form.
For both the beneficiary and estate designations, you can complete form RC240 permitting the exempt rollover—but you have to act fast. You must roll the funds over into the surviving spouse’s TFSA by December 31 of the year following the spouse’s death, and you must submit form RC240 within 30 days after the TFSA rollover contribution is made. That is a bit of work and there is room in there to make a mistake.
To make things easy—and almost foolproof—spouses should name each other as successor holders of their TFSAs. A successor designation allows for an automatic exempt rollover contribution to your TFSA. The growth on the TFSA is not taxable, but it is not eligible for the exempt rollover.
If you are wondering if any of this really matters, yes, it does. We have come a long way from when TFSAs were first introduced and you could only shelter $5,000 from taxes on income and realized gains in that first year. The current lifetime contribution limit is $102,000. That is $102,000—plus any investment growth—that you can shelter from taxes and that you should pass on to your spouse at death.
Find out how much you can contribute to your TFSA today using our calculator.
Rolina, you and your husband did well maximizing your TFSAs so that his contribution room could live on with you. Unfortunately, not everyone is able to do what you two did.
Those who are not able to max out their TFSA may want to consider a “deathbed contribution” if death is imminent. A deathbed contribution means topping up your TFSA so your spouse will have a larger TFSA with which to shelter money. There may not be an immediate need for the additional TFSA room, but who knows what the future may bring? There may be a home sale, an inheritance, a transfer of money from a registered retirement income fund (RRIF) to a TFSA… again, who knows?
If you don’t have the cash, ask your spouse to top up your TFSA from their TFSA, or take a loan that your spouse can later pay off. Your spouse will pay off the loan after the exempt rollover into their TFSA and then they are set to always add the money back into the TFSA for the tax sheltering.
Finally, Rolina, it may be worth if for you to go to your CRA My Account portal to check if you have overcontributed. I’m suggesting that because you mentioned you were named as the beneficiary rather than successor holder. If that is the case, the RC240 would have had to be completed, and I suspect it was because you didn’t mention receiving overcontribution notifications from the CRA, and five years have passed. Again, I suspect you are OK, but check just in case.
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