The article “Can you avoid probate taxes on TFSAs?” was originally published in MoneySense on October 28, 2022. Photo by Sora Shimazaki from Pexels.

Find out how to shield TFSAs from probate taxes, when no beneficiary or successor has been named for the registered accounts.

“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 for your loss, Scott. I think I can give you some direction.

tax-free savings account (TFSA) can have a named beneficiary or a successor holder. A successor holder is unique to a TFSA account. Only a spouse can be named as a successor holder. A successor holder spouse literally takes over the TFSA account of their deceased spouse. The account does not need to remain separate from their own TFSA and can be consolidated though.

A beneficiary designation works a bit differently. A non-spouse can only be named as a beneficiary, not as a successor holder. A spouse can also be named as a beneficiary and when TFSAs were first introduced, many institutions only offered a beneficiary designation. So, many early adopters of TFSAs may find their spouse is named as beneficiary, not successor holder, if they have not updated it. Quebec residents cannot name a successor holder or beneficiary.

A key difference with naming a spouse as successor holder instead of beneficiary is that income and growth from a TFSA after death is taxable to the beneficiary. Not so with a successor holder.

Given your wife’s account, Scott, had no designation at all, it will be payable to her estate by default. But fear not—there is a solution.

As executor of her estate and sole beneficiary, you can have the account transferred from her TFSA to your own without impacting your TFSA room. You may not be a successor holder or beneficiary of the account, but you are a beneficiary of her estate. The caveat is the transfer must be done by December 31, 2023 (the end of the year after her death). This should be plenty of time to settle her estate and distribute her assets.

What happens to a TFSA after death

Now, onto the estate distribution and your question about probate taxes. Probate or estate administration tax is payable on the value of an estate’s assets at the time of death. It is important to distinguish estate assets from other assets of the deceased.

A beneficiary for a TFSA, registered retirement savings plan (RRSP) or life insurance policy receives their distribution without the assets passing through the estate. Typically, only a death certificate is required. Jointly held assets or certain assets like private company shares may also be able to avoid probate.

Probate fees and TFSAs

Probate or estate administration tax is payable on the value of the assets, including TFSAs, that are passing through an estate and distributed based upon the terms of a will. So, if an asset is not held jointly or does not have a beneficiary or successor holder, it will generally be subject to probate.

Probate requires paperwork to be submitted to the province or territory and a probate fee or estate administration tax payable based on the value of the relevant assets. Alberta, Quebec, and the territories have flat fees ranging from $0 to $525. The other provinces have rates of 0.4% to 1.695%, typically on estate values above a certain threshold.

A fee of 1% on a large estate would cost $10,000 per $1 million of assets, so could amount to a significant cost in dollars, albeit a relatively small cost in percentage terms. Some people go to great lengths to avoid probate and potentially trigger more significant costs or other risks.

In your case, Scott, you can likely transfer your wife’s TFSA to your own account, based upon the value as of her date of death. Income and growth until then may be taxable to you. The market value of her TFSA as of her date of death (not just the gains, to answer your question) may be subject to probate or estate administration tax depending on where you live and the value of other assets that may pass through her estate.

It is a shame the brokerage firm did not flag the lack of beneficiary designation, but it is not uncommon for that to go overlooked. It is a good reminder to others to double-check their account designations to be sure they are appropriate and up-to-date.

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.

This article was originally published on April 18, 2022. The video was added on Oct. 28, 2022.