​Beneficiaries: beware of what can go wrong if someone with a TFSA dies 

Jamie Golombek: A recent tax case illustrates the consequences of handling the deceased’s funds incorrectlyPublished Feb 06, 2025  •  Last updated 2 hours ago  •  5 minute read Join the conversation The tax consequences and opportunity for continued tax-free growth in the hands of the inheritor will depend on who receives your TFSA proceeds after you die, writes Jamie Golombek. Photo by Getty Images/iStockphotoReviews and recommendations are unbiased and products are independently selected. Postmedia may earn an affiliate commission from purchases made through links on this page.Though tax-free savings accounts (TFSAs) have been around for a while, there’s still some confusion about what happens on the death of a TFSA holder. The tax consequences and opportunity for continued tax-free growth in the hands of the inheritor will depend on who receives your TFSA proceeds.Article contentArticle contentA recent tax case, decided late last year, shows what can happen when a TFSA holder dies and the funds are incorrectly handled by the beneficiary.Advertisement 2Story continues belowThis advertisement has not loaded yet, but your article continues below. View more offersArticle contentAs a refresher, under the tax rules, when the holder of a TFSA dies the fair market value of the TFSA immediately before death is considered to be received by the holder tax-free. The holder had the choice of naming either a “successor holder” or beneficiary.The successor holder can only be your surviving spouse or common-law partner. If you name a successor holder, the TFSA continues growing tax-free after you’re gone, and they become the new TFSA holder.If you don’t name your spouse as the successor, you can name them as the beneficiary of your TFSA. If so, they have until Dec. 31 of the year following the year of your death to contribute any payments received out of your TFSA, up to the date of death value, into their own TFSA without affecting their unused TFSA contribution room. This is known as an “exempt contribution,” and the surviving spouse must report it to the Canada Revenue Agency on Form RC240, Designation of an Exempt Contribution TFSA, within 30 days after the contribution is made.The disadvantage here is that all income earned inside the TFSA, as well as any increase in the fair market value of the TFSA’s assets from your date of death until the date the TFSA is paid out to your beneficiary, will be taxable as ordinary income to the beneficiary. This includes amounts that otherwise may be tax-preferred Canadian dividends or 50 per cent taxable capital gains. That’s why if you have a spouse, it’s generally best to name them as a successor holder instead of the beneficiary.Top StoriesGet the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.We encountered an issue signing you up. Please try againArticle contentAdvertisement 3Story continues belowThis