Unfortunately, my wife passed away a couple of weeks ago. When I set up both her TFSA and my TFSA account on an online brokerage account, I did not name her or me as the successor or beneficiary to each other’s account. Our wills made each other the executor and beneficiary of 100% of everything. I do not know how I missed this as I always have listed a beneficiary.
I would like to ask is her TFSA now going to be listed with the estate and subject to paying probate taxes? Are probate taxes based on the entire amount or the gains after her death. Shame on me—I wanted to keep her TFSA going for the kids, but I guess this will not take place.
So, my question is what happens to her TFSA and how much are probate taxes—her TFSA account is at $38,000.
Sad part is all of our other RRSPs and TFSA accounts with another firm have us listed as beneficiaries or successors to each other’s accounts.
I would really appreciate your feedback on this as I have overlooked this, and I would have thought the online brokerage firm would have flagged this.
—Scott
What it means to be a beneficiary and a successor for TFSAs
My condolences, Scott. Losing a spouse is devastating, and dealing with financial details while grieving makes it even harder. Here’s a clear explanation of how beneficiary and successor designations work for tax-free savings accounts (TFSAs) and what that likely means for your situation.
A TFSA can have a named beneficiary or a successor holder. Successor holders are unique to TFSAs and, under the rules, only a surviving spouse can be named as a successor holder. When a spouse is designated as successor holder, they effectively step into the deceased spouse’s TFSA: the account can be transferred to the surviving spouse’s TFSA without affecting their contribution room, and it does not pass through the estate.
By contrast, a beneficiary designation is different. Non-spouses can only be named as beneficiaries, not successor holders. Spouses can be named as beneficiaries, but if a spouse is a beneficiary rather than a successor holder, any income or growth that accrues in the TFSA after the date of death may be taxable to the beneficiary. Many early TFSA accounts offered only beneficiary designations, so it’s common for long-standing accounts to list a spouse as beneficiary instead of successor holder unless it was updated. Note that Quebec residents face different rules regarding TFSA designations.
Since your wife’s TFSA had no designation at all, the account will generally be considered part of her estate by default. That means it will be dealt with through the estate administration process unless an alternative applies.
What happens to a TFSA after death
As executor and sole beneficiary of your wife’s estate, you do have options. Even if you were not named as successor holder or beneficiary on the TFSA itself, you can transfer the TFSA assets from your wife’s account to your own TFSA as the estate beneficiary. To preserve the TFSA treatment, that transfer should be completed by December 31 of the year following the year of death. Acting within that timeframe typically allows the transfer to occur without affecting your own TFSA contribution room.
It’s important to be mindful of any investment income or gains that accrue between the date of death and the transfer. If the transfer follows the rules for estate transfers to a surviving spouse, income earned after death could be taxable to the beneficiary in some cases unless the surviving spouse is a successor holder.
Probate fees and TFSAs
Probate, also called estate administration tax in some jurisdictions, applies to assets that pass through the estate under the terms of a will. If an asset is jointly held, or if it has a named beneficiary or successor holder who receives it directly, it may avoid probate. But an asset with no surviving beneficiary designation typically becomes an estate asset and may be subject to probate fees.
Probate fees vary by province and territory. Some jurisdictions use a flat fee, while others calculate fees as a percentage of the estate value above a threshold; common percentage ranges in Canada are roughly 0.4% to 1.695% on qualifying estate values. For example, a 1% probate fee on a $1 million estate would amount to $10,000. Smaller accounts produce much smaller absolute costs, but probate can be a meaningful expense on larger estates.
In your case, Scott, the TFSA’s entire market value at the date of death—not just the investment gains—would typically be included when determining whether probate applies and what the fee would be. If the TFSA is treated as an estate asset because no beneficiary or successor holder was named, its full value as of the date of death (the $38,000 you mention) is the amount that would be considered for probate calculation, along with any other estate assets passing under the will.
Given that the TFSA is relatively modest in size, the probate cost on that single account alone is likely to be small. However, the total probate cost depends on the combined value of all assets in the estate that are subject to probate.
It is unfortunate the brokerage did not prompt you to add a beneficiary or successor holder, but this oversight is common. Use this as a reminder to review all account designations across institutions and update them to match your estate plans.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
Consider speaking with a licensed advisor
Watch: 4 things to consider before putting your money in a TFSA or RRSP
Read more from Jason Heath:
- How are you taxed when you sell a small business?
- What to do when you overcontribute to your RRSP
- Converting a segregated fund to a RRIF
- Do RRIF beneficiaries pay tax?