In the creation of the TFSA product Canada Revenue Agency (CRA) has made the reporting totally electronic. Great idea but, as with everything new, it take a couple of years to get the bugs out, especially when every financial institution (FI) has its own data system that must be developed to CRA requirements .
From what I am hearing, one of the most misunderstood requirements is when a holder dies and a spouse/common-law partner (clp) was named as successor holder. Some FIs are simply closing the deceased’s TFSA and transferring the funds over to the surviving spouse’s/clp’s TFSA. A BIG NO-NO!!
CRA is quite specific that in the year of death with a successor holder named, the deceased holder’s TFSA contract reporting for that year must show:
i) surviving spouse/clp as the holder’s name
ii) a “successor holder account” indicator as “Y” (yes)
iii) name of the deceased holder
iv) Social Insurance Number of the deceased holder
v) date of the deceased holder’s death
Then in the year following death, the “successor holder account” indicator should revert to “N” (no) with the deceased holder’s information dropped. If the indicator remains as “Y”, the deceased holder’s name, SIN and date of death must also be reported.
Let’s look at an example:
2009 - Joseph Member opened his TFSA naming his wife Mary as successor holder and beneficiary
Mary member opened her TFSA naming Joseph as successor holder and beneficiary
CRA 2009 reporting showed: Contract #: 55221
Holder: Joseph Member
Successor Holder Account: N
Contract #: 55222
Holder: Mary Member
Successor Holder Account: N
2010 - Joseph Member died July 23, 2010
After receiving proper estate documentation, the contract was changed to Mary’s name, the “successor account indicator” was changed to Yes and Joseph’s name, SIN and date of death are added.
Regardless if Mary continued the contract in her name or transferred the funds to her own TFSA after the name was changed, the CRA 2010 reporting showed:
Contract #: 55221
Holder: Mary Member
Successor Holder Account: Y
Name of Deceased Holder: Joseph Member
SIN of Deceased Holder: 999 999 998
Date of Death of Deceased Holder: 2010-07-23
Contract #: 55222
Holder: Mary Member
Successor Holder Account: N
2011 – If Mary had continued TFSA contract 55221 the CRA 2011 reporting will show:
Contract #: 55221
Holder: Mary Member
Successor Holder Account: N
Contract #: 55222
Holder: Mary Member
Successor Holder Account: N
In all other estate situations the TFSA is terminated and must be reported in the year of death TFSA filing providing the date of death and the fair market value at date of death. If the FI is not made aware of the holder’s death until the year following the year of death, an amended TFSA filing on that contract for the year of death must be submitted. CRA has some great examples on their web-site – click here to link to their Frequently Ask Questions site and scroll down to their Simplied Examples.
Where there is a surviving spouse/clp who is not name as successor holder but is either named only as beneficiary or heir to the estate, s/he has the ability to make an exempt contribution to his/her own TFSA without affecting his/her own unused TFSA contribution limit. The total exempt contribution:
a) cannot exceed the value of the deceased’s TFSA as at date of death
b) must be contributed to his/her TFSA by December 31st of the year after death
c) once made, CRA
Form RC240, Designation of an Exempt Contribution Tax-Free Savings Account (TFSA) must be completed and filed with CRA within 30 days of the contribution by the spouse/CLP.
Refer to CRA’s website Designation of an Exempt Contribution by a Survivor for more information and an example.