What is the difference between a successor annuitant and a beneficiary?
When opening a TFSA and you plan to leave it to your spouse when you pass away what is the better option:
- Naming your spouse as a successor annuitant?
- Naming your spouse as a beneficiary?
TFSA’s may be federally regulated but they are subject to provincial legislation as well. Most provinces allow for both a successor annuitant and a beneficiary.
What are the two main differences?
- Naming your spouse as a successor annuitant: Should you pass away, and you have named your spouse as the successor annuitant they will become the new 'holder' and the tax-exempt status of the TFSA remains intact. This does not affect the TFSA contribution room of the spouse.
The Income Tax Act only allows the tax-exempt status of the TFSA to be passed onto the spouse or common law partner who is the successor annuitant. The surviving spouse can hold the two TFSA accounts or consolidate them into one if they wish. This also means they will bypass probate fees since the TFSA will be passed onto the spouse and not be included their estate.
2. Naming your spouse as a beneficiary: The TFSA will still pass to the spouse on a tax-exempt basis but there are differences and more paperwork:
- The transfer must be completed within the rollover period ie. beginning on the day of death and ends on December 31st of the following year.
- Transfers done during the rollover period may be deemed to be exempt contributions and do not affect your TFSA contribution room.
- Exempt contributions cannot exceed the fair market value of the deceased’s TFSA on the date of death meaning any TFSA growth after the date of death will be taxable.
- To declare an exempt contribution you will need to fill out a Designation of Tax- Free Savings Account (RC240 form) within 30 days of the contribution from your deceased spouse and send to the CRA.
- This must be done within 30 days of the contribution to ensure that the deceased spouse’s TFSA does not affect your own TFSA contribution room.
The best strategy when it comes to transferring your TFSA to your spouse is designating them as a successor annuitant and having backup beneficiary/beneficiaries if your province allows. This will provide for a seamless transition of your TFSA assets to your spouse at your time of death.
If you and your spouse should die at the same time your beneficiary/beneficiaries will receive the funds outside of your estate bypassing probate fees and precious time.
