Since their introduction in 2009, Tax Free Savings Accounts (TFSAs) have become a popular savings vehicle for Canadians. TFSAs allow you to earn tax-free income through savings in high interest savings accounts, mutual funds, exchange-traded funds, and other investment vehicles.

Given the tax advantages of TFSAs, such accounts are quickly becoming one of the most significant assets individuals hold when they die; it is therefore important to address TFSAs in your estate plan, which is commonly done with an appropriate beneficiary designation in a will.

When drafting a will to address the distribution of TFSAs, you have three options: to name a “successor holder”, to name a “beneficiary” , or to make no designation. Although every circumstance is different, it is generally recommended to name a successor holder whenever possible for the reasons set out below.

Designating a successor holder

In your estate plan, you can designate your spouse as your TFSA successor holder ( only a spouse qualifies as a successor holder; anyone else must be listed as a designated beneficiary) . When you die, your spouse, as successor holder, becomes the new owner of your TFSA. The value of the TFSA and any income it earns after you die continues to be sheltered from tax under the new owner. The surviving spouse can continue to maintain the account and contribute new money, subject to his or her own unused contribution room. The tax advantages of this approach make it the recommended designation.

Designating a beneficiary

If you designated your spouse as a beneficiary, your TFSA would cease to exist on the date of your death. When your estate is settled, the full value of the TFSA would be paid to your designated beneficiary. If your spouse is the designated beneficiary, he or she can contribute an amount up to the value of your TFSA to their own TFSA without impacting their contribution room. If you name someone other than your spouse as your beneficiary, any contribution would be subject to their unused contribution room.

These contributions must be made within a certain time frame and paperwork has to be filed with Canada Revenue Agency when the contribution is made. In addition to these complications, any income or growth earned by the TFSA after you die is fully taxable to your spouse or other beneficiary.

No beneficiary designation

The third option is to not name a successor holder or beneficiary.

In this case, the proceeds of the TFSA are paid to the beneficiaries of your estate. There may be reasons why you want the TFSA proceeds to be paid out pursuant to the terms of your will, rather than directly to a successor holder or designated beneficiary. For instance, if your will sets up a trust for your minor children, you may want the proceeds from the TFSA to flow into that trust, through your will, rather than flow directly to a successor holder or designated beneficiary. In that case, you would forego the tax benefits of naming a successor holder or designated beneficiary and instead provide for the funds to flow through your estate to the trust.

Given the options available, you should consult a lawyer or estate planning advisor to ensure that your designation is appropriate for your circumstances.