A Tax-Free Savings Account (TFSA) is a great way to save money without being subject to taxation. However, a common question that many TFSA holders in Canada may ask is, what happens to a TFSA when you die? Understanding the rules and options can help ensure that your account is managed the way you want it to be—and potentially save your beneficiaries from unnecessary complications.
Key Takeaways
- When you die, what happens to your TFSA depends on whether you’ve named a beneficiary or successor holder.
- If you named your spouse or common-law partner as the successor holder, they can take over your TFSA without impacting their own contribution room, and the account can continue to grow tax-free.
- If you designated a beneficiary, the fair market value (FMV) of the TFSA at the date of death is tax-free, but any returns earned after the date of death is subject to taxation.
- If no beneficiary or successor holder is named, the TFSA will become part of your estate and will be distributed according to your will.
What Happens To Your TFSA When You Die?
Your TFSA does not simply disappear when you die. It goes to either a designated successor holder or beneficiary. You must name these parties before your death in your TFSA contract or your will.
Your TFSA contribution room cannot be passed on to a successor holder or beneficiary.
| Feature | Successor Holder | Beneficiary |
| Eligibility | Only spouse or common-law partner | Anyone (spouse, child, friend, charity) |
| Account Continuation | TFSA continues under the successor holder’s ownership, maintaining tax-free status | TFSA does not continue; funds are paid out as a lump sum |
| Contribution Room Impact | No impact on the successor holder’s TFSA contribution room | Funds do not impact the beneficiary’s TFSA contribution room |
| Tax Treatment on Growth | Future growth remains tax-free | Future growth after death is taxable |
| Transfer Process | Account directly transfers to a successor | Lump sum payout to the beneficiary |
Successor Holder
A successor holder is the spouse or common-law partner of the TFSA account holder at the time of their death. That person becomes the new account holder.
They have the same rights as the TFSA account holder, including the right to revoke any beneficiary designation and to make contributions (provided the successor holder has unused contribution room).
All provinces and territories except Quebec allow for the designation of a successor holder for a TFSA. They can be designated in the TFSA contract or a will.
Successor holders become the new TFSA holders, and the TFSA continues growing tax-free. Keep in mind that any contributions that exceed the limit will be taxed.
Beneficiary & Non-Spousal Beneficiary
If the beneficiary is not a successor holder (ie. a child or another individual), the TFSA does not continue as is.
Instead, the fair market value at the date of the account holder’s death is transferred to the beneficiary tax-free. However, any income earned after the date of death is subject to taxation.
The beneficiary can withdraw these funds or contribute them to their own TFSA, as long as they have the available contribution room.
| What Is A TFSA? A Tax-Free Savings Account (TFSA) is a type of savings account that allows you to earn investment income tax-free. |
What If You Don’t Have A Designated Successor Holder Or Beneficiary?
If you don’t have a designated successor holder or beneficiary, your TFSA falls to your estate. This will add your TFSA to the value of your estate.
Your estate will thus need to pay larger probate fees, which are the fees associated with having the courts legally approve your will. The assets in your TFSA are taxed as ordinary income.
Who Can Be A TFSA Account Beneficiary?
A TFSA account beneficiary can be any of the following:
- Spouse/Common-Law Partner. These individuals can be designated as successor holders or beneficiaries.
- Former Spouse/Common-Law Partner. Even those who were previously in a relationship with the account holder may be a beneficiary.
- Children. This includes biological, adopted, or stepchildren.
- Qualified Donees. This includes registered charities and municipalities.
What If The Deceased Account Holder Has Over-Contributed To Their TFSA?
If the deceased TFSA account holder has over-contributed to their TFSA, a tax of 1% per month applies to the new account holder.
This remains in effect for each month that the over-contribution remains in the TFSA. This tax starts in the month of the deceased TFSA account holder’s death.
Upon the TFSA holder’s death, the successor holder is deemed to have made a contribution to their TFSA, equal to the deceased TFSA holder’s over-contribution.
If that contribution results in an over-contribution to the successor holder’s TFSA, they are subject to a 1% tax monthly, until the excess contribution is removed from the account.
Does A TFSA Have To Go Through Probate?
Generally speaking, if a successor holder or designated beneficiary is named, then the TFSA does not have to go through probate.
Therefore, when you name a spouse or common-law partner as a successor holder, they can take over your TFSA without it becoming part of your estate, and as such, probate fees and delays can be avoided.
However, if no beneficiary or successor holder is designated, the TFSA will become part of your estate and may go through probate.
| Probate Required? | |
| Successor Holder or Beneficiary is Named | No |
| Successor Holder or Beneficiary is Not Named | Yes |
The Importance Of Estate Planning
To avoid complications with your TFSA after you die, dictate what you want to be done with it in your will or name beneficiaries or a successor holder beforehand. If you name your estate as the recipient, you can distribute the TFSA proceeds based on the terms of your will.
In provinces and territories that allow successor holders, you can appoint the successor holder in your will. You can also designate beneficiaries in your will.
Final Thoughts
A TFSA is a great way to set money aside tax-free. When you die, your TFSA goes either to a successor holder or beneficiaries named before your death. If you don’t have a designated successor holder or beneficiaries, the TFSA falls to your estate, which will result in larger probate fees. Therefore, you should either designate the successor holder or beneficiaries in your TFSA contract or your will.
