Financial planners are unanimous: it is better to avoid death. That said, they argue that it is still best to be well prepared, because transferring a tax-free savings account (TFSA) between spouses or family members when someone dies involves some challenges. What are the rules?
Let’s start with the easy part: money accumulated in a TFSA until death is not taxable for the person receiving the money. The key words here are “until death,” notes Raffaele Nardi, financial planner at R. Nardi Wealth Management and group savings representative at Investia Financial Services.
Because the capital gain that was realized in the TFSA between the time of death and the closure of the account – whether capital gains on securities, interest or dividends – remains taxable.
Let’s imagine, for example, that a person had deposited $75,000 in their TFSA and that this amount increased in value by $25,000 until the time of death, in January 2024.
If these investments have increased to $105,000 in June 2024, when the account is closed, following good stock market performance, the only amount that will be taxable will be the difference of $5,000 between the amount at death and that when the account is closed.
Profits of $25,000 earned over the person’s lifetime will not be taxed.
PHOTO CHARLES WILLIAM PELLETIER, SPECIAL COLLABORATION
Raffaele Nardi, financial planner at R. Nardi Wealth Management and collective savings representative at Investia Financial Services
“We must strictly respect these rules, otherwise we could find ourselves later with a surprise tax bill with additional interest,” says Raffaele Nardi. So avoid this unnecessary stress and do not hesitate to consult a notary, an accountant or a planner if you are in doubt. »
A damper
The person who receives TFSA investments from a deceased person can deposit them in their own TFSA, but the impacts will not be the same if these people were not spouses, explains Jocelyn Boisvert, senior portfolio manager at Scotia Wealth Management.
For common-law spouses or married couples, the person who receives the money from the deceased can deposit the amounts into their TFSA without their own rights being reduced.
If the surviving spouse can receive the deceased’s TFSA investments without their own rights being affected, it should be understood that they do not inherit the remaining contribution rights of the deceased spouse.
Jocelyn Boisvert, senior portfolio manager at Scotia Wealth Management
For example, let’s say the survivor has already contributed $70,000 to their TFSA and is entitled to take $95,000 in total – the maximum for a Canadian who was 18 or older in 2009.
If this person inherits their spouse’s TFSA, which had a value of $50,000, they will be able to deposit it in full into their own TFSA and keep the $25,000 of contribution room they had left. The deceased’s contribution rights – let’s say they are $45,000 – will however not be added to the $25,000 of rights remaining to the survivor.
“In Canada, to carry out this operation, you must complete a form, RC240. It is imperative to complete it. If you can’t find it online, contact the Canada Revenue Agency. They will send it to you,” says Jocelyn Boisvert, who also advises calling on experts to ensure that the documents are completed adequately.
If the person receiving the TFSA is not the spouse of the deceased, however, things are very different. In this case, the surviving person is free to deposit the money into the account of their choice, whether registered or not. But if she chooses to deposit the amount in her TFSA, she will have to make sure she has enough contribution room to do so.