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TFSA and spouse as joint beneficiary

Investments, Personal Finance

Posted by Peter Wouters

Jul 26, 2018 2:00:00 PM

Directeur, Planification fiscale et successorale et planification de la retraite, Gestion de patrimoine
Placements Empire Vie

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Gaeten and Mirielle are a middle aged couple who met through friends. They have been together for almost five years. Gaeten is divorced with one adult child. Mirielle, a widow, has two children of her own. The couple do want to take care of each other should either one predecease the other. They both wish to have at least some of their own investments pass on to their respective children.

Gaeten has named Mirielle and his own daughter, Marie, as beneficiaries of his Tax Free Savings Account. What happens
in the event that Gaeten predeceases Mirielle and Marie?

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Gaeten has taken full advantage of his Tax Free Savings Account (TFSA) and has experienced some very good growth in his investment portfolio.

A holder living anywhere in Canada can designate a beneficiary on a Tax Free Savings Account investing in an insurance GIC or segregated fund. (S)he can designate a beneficiary on a tax free savings account holding any other eligible investments if (s)he lives outside of Quebec. Gaeten has named Mirielle and his own daughter, Marie, as beneficiaries of his Tax Free Savings Account. What happens in the event that Gaeten predeceases Mirielle and Marie?

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Mirielle and Marie will receive the fair market value of Gaeten’s 
Tax Free Savings Account as of the date of his passing. Those 
amounts will be tax-free.


Mirielle and Marie will receive the fair market value of Gaeten’s Tax Free Savings Account as of the date of his passing. Those amounts will be tax-free. Any growth in Gaeten’s plan that occurs between the time of his death and the transfer to the beneficiaries is fully taxable to the beneficiaries. The proceeds will be apportioned between them according to the instructions given in the plan.

As a joint beneficiary Mirielle cannot elect to designate any portion
of her share as an “exempt contribution”.

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Mirielle cannot elect to designate any portion of her share as an “exempt contribution”. This election allows a surviving spouse or common law partner (‘a survivor’) who is a beneficiary to contribute and designate all or a portion of a survivor payment as an “exempt contribution” without affecting their own Tax Free Savings Account contribution room. The exempt contribution election is not available to surviving spouses or common law partners who are named as beneficiaries unless they are named as the sole beneficiary of each plan designated as a Tax Free Savings Account originally owned by their now deceased spouse or common law partner.

There are two other instances when the exempt contribution election would not be available to the surviving spouse/common law partner, Mirielle. 

  1. The deceased’s Tax Free Savings Account included amounts classified as excess contributions. If, at the time of Gaeten’s death, there was an excess amount in his Tax Free Savings Account, a 1% tax applies to the highest excess amount for each month in which the excess remained, up to and including the month of Gaeten’s passing. Any earnings or increase in value reasonably attributable to deliberate excess contributions will be considered an advantage and treated accordingly.

  2. The survivor payment was made after the rollover period, specifically, “the period that begins when the plan holder (Gaeten) passes and the end of the calendar year that follows the year of death.”
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Both Mirielle and Marie can contribute part of their respective  proceeds to their own Tax Free Savings Accounts provided they have contribution room.


Both Mirielle and Marie can contribute part of their respective proceeds to their own Tax Free Savings Accounts provided they have contribution room.

If Gaeten had opened two Tax Free Savings Accounts and funded them equally up to his combined annual limit, then invested those monies in the same manner, he could have done the following.

  • Gaeten could have named Mirielle as sole beneficiary or successor holder (subrogated policyholder in Quebec) of one plan and named Marie as sole beneficiary of the second plan. Mirielle would have had more options and had the opportunity to optimize any special tax treatment.

  • Alternatively, Gaeten could have split his plan into two accounts and then named individual beneficiaries in each one.
What are the differences for a spouse named as a beneficiary compared to being named successor holder (subrogated policyholder in Quebec)? Watch for my next article.
 

Republished with permission by Peter Wouters. For the complete list of articles, please visit here.


Related articles:

Tax Free Savings Account (TFSA) and successor holder

 

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