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Jan 1, 2016

The Importance Of Naming A Successor

by Camillo Lento

Camillo LentoTax-free savings accounts (TFSAs) are a popular investment vehicle for many Canadians. TFSAs afford individuals with the ability to save for retirement on a tax-free basis while being able to withdraw funds at any time with no penalty. TFSAs can form a significant portion of an individual’s portfolio as an individual can contribute upwards of $41,000 into their TFSA. Deciding what to invest in a TFSA is an important consideration that receives much attention, while succession and estate planning receives less attention.

Have you ever considering what happens to the funds in a TFSA when the holder dies? What happens to the funds depends on whether the TFSA holder identified who will receive the funds, and the relation of the person to receive the funds to the TFSA holder.

Who Can Receive TFSA Funds?

An individual can arrange to have one of the following events with respect to their TFSA funds take place upon their death:

  • Appoint a successor holder for the TFSA account;

  • Designate a beneficiary for the TFSA account;

  • Assign then TFSA account to form part of their estate.

The income tax implications of each of these three options differ.

Successor Holder

An individual can appoint their spouse or common-law partner at the time of death to be the successor holder for their TFSA account. A successor holder is typically assigned through the TFSA forms and documents, but can also be assigned through a will.

The benefit of naming a successor holder is that the TFSA will continue to exist in the hands of the successor holder. That is, the TFSA will continue to exist after an individual’s death, and there is no income tax implication at the time of death. The successor holder will be able to continue to earn income on a tax-free basis. Moving forward, the successor holder will be able to make contributions based on their own contribution room.

Designated Beneficiary

A designated beneficiary can be assigned when there is no successor holder. For example, an individual may designate their children, friends or someone else as a beneficiary of the TFSA. A designated beneficiary is deemed to have received the funds from the TFSA for a cost basis equal to the fair market value at the time of death. From a tax perspective, the fair value of the TFSA received by the designated beneficiary is viewed to be a non-taxable capital receipt and can be withdrawn on a tax-free basis. However, any accretion in the value of the TFSA after the date of death will be taxable for the designated beneficiary.

If the designated beneficiary is a spouse or common-law partner, the individual can transfer all or a portion of the TFSA amount into their own TFSA without impacting their own unused contribution room. This exempt contribution rules are more restrictive than those applicable to successor holders.

If the designated beneficiary is a minor, a trustee or guardian has to be appointed to receive the proceeds of the TFSA.

Forming Part Of The Estate

A TFSA will form part of a deceased individual’s estate when a successor holder or designated beneficiary is not named. The funds in the TFSA will be distributed in accordance with the deceased individual’s will.

Any income earned in the TFSA up to the date of death are exempt from income tax. The funds in the TFSA at the date of death will form part of a deceased individual’s estate. Income earned after the date of death is included in the taxable income of the estate and is taxable by either the estate or the beneficiaries.


Double-check with your TFSA administrator to determine if a successor holder or designated beneficiary has been named. If you plan to leave your TFSA to your spouse or common-law partner, make sure that you have named a successor holder. This will ensure that your TFSA will continue to exist and grow on a tax-free basis into the future.

Camillo Lento, PhD, CPA, CA, CFE, Faculty of Business Administration, Lakehead University, Thunder Bay, ON (807) 343-8387,