TFSA: Beneficiary vs Successor Holder

Posted by Ludmil Natchev 27-12-2022

The TFSA is one of the best tools Canadians have to save for their retirement. One of the lesser-known benefits of the account relates to estate planning, as assets in the TFSA can be passed on to the estate without paying tax. In this article, we take a look at the tax implications of transferring a TFSA to a beneficiary versus a successor holder, and which is the best choice for most Canadians.

Whenever you set up a TFSA, you will need to list a beneficiary. This is meant to help expedite the process of transferring assets to your loved ones once you pass. It also helps avoid the probate fees typically associated with transferring assets through the estate and it keeps the TFSA from getting held up in the lengthy estate process. Another key benefit of setting up a beneficiary relates to privacy. Estate information is public, so any assets passing through the estate are visible to everyone. By naming a beneficiary, the TFSA won’t pass through the estate and will go directly to the beneficiary, and information about the assets stays private.

For the TFSA, you have the choice of naming a beneficiary and a successor holder. The main difference between the two designations is that a beneficiary will receive the assets from the TFSA, but the successor holder will receive the TFSA account itself. For example, if a TFSA worth $80,000 was passed to the beneficiary, they would receive $80,000, but the TFSA would be shut down. This implies that all the tax-free space available to the account is no longer accessible to the beneficiary. Therefore, all future investment gains from this sum of money will be fully taxable unless the beneficiary has left over contribution room in their personal TFSA. On the other hand, a successor holder would receive the money inside the account and the contribution room as well. This means that future investment gains from these assets will not be taxable, and if the successor holder decides to make a withdrawal, they will receive this TFSA contribution room back the next year.

There is one key limitation to assigning a successor holder. Only spouses and common law partners can be named a successor holder. Children, siblings and friends can be named as a beneficiary but not as a successor holder. It is important to note that if a spouse or common law partner is designated as a beneficiary, there is the opportunity to receive the same benefits as a successor holder. This opportunity doesn’t last long, and a spouse looking to change this designation will have to act before December 31st in the year following their partner’s passing. In this case, investment gains between these two points in time are fully taxable. With this in mind, it’s always best to list spouses or common law partners as successor holders.

  • Subscribe To Our Newsletter

Sign up to receive our newsletter, market commentary and trends, recent publications, and list of events.