Estate Planning Should Include Your Tax-Free Savings Account
Posted on 10. Mar, 2010 by admin in General
No one likes to think of these things, but estate planning is crucial to helping your loved ones settle your affairs as efficiently as possible.
Since January 2009, many Canadians have opened Tax-Free Savings Accounts (TFSA) to build equity while paying no tax on gains. Canadian residents aged 18 or older with a valid Social Insurance Number can contribute up to $5,000 a year and carry over unused amounts in subsequent years. Your unused TFSA contribution room will be shown on your T1 notice of assessment and online if you use the My Account service from the Canada Revenue Agency.
In all provinces except Quebec, when a spouse or common-law partner has been designated the successor holder of a TFSA, that person takes over ownership of the TFSA at the date of the original owner’s death. The successor holder usually pays no tax on the value of the TFSA and no tax on income or gains in the TFSA after the date of death.
If there is no successor holder when the holder of a TFSA dies, the holder is considered to have received an amount equal to the fair market value (FMV) of all the property held in the TFSA at the time of death. After the holder dies, the annuity contract is no longer considered a TFSA. All earnings that accrue after death are taxable to the beneficiaries and must be included in their income for that year.
However, a beneficiary will not have to pay tax on any payments made out of the TFSA that do not exceed the FMV of all the property held in the TFSA at the time of death.
A surviving spouse or common-law partner (not named as a successor holder) will usually be able to transfer amounts they receive from the deceased’s TFSA into their own TFSA by designating such transfers as an exempt contribution.
It’s all a bit much to take in if you’re grieving or planning your estate. Familiarize yourself with the rights and responsibilities of TFSA beneficiaries at www.cra.gc.ca/tfsa.