From January 2009, Canadians over the age of 18 can save up to $5,000 a year in a Tax Free Savings Account (TFSA). There are some potential issues you should know about regarding your TFSA and your will.
The TFSA option will be a very attractive option for many Canadians. A reminder of the features:
- Contributions to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
- You can withdraw funds from the TFSA at any time for any purpose.
- The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.
- Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
- Unused TFSA contribution room can be carried forward to future years.
- Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.
An issue you should be aware of is legal confusion about beneficiaries and wills.
If you have invested in a registered retirement savings plan (RRSP) or retirement income fund (RRIF), or certain types of life insurance plan, you are probably accustomed to signing a form at your bank or finance company, designating who the beneficiary should be in the event of your death. All provinces allow the naming of beneficiaries for RRSPs, RRIFs, and certain life insurance plans.
Having a designated beneficiary for your RRSP, RRIF, or life insurance plan allows the money to go directly to the beneficiary upon your death and bypass the estate. In provinces with high probate taxes (such as BC and Ontario!), this is an important benefit.
Not all provinces allow the naming of beneficiaries for TFSAs. At mid-2009:
- Alberta – allowed
- British Columbia – allowed
- Manitoba – not yet allowed
- New Brunswick – not yet allowed
- Newfoundland and Labrador – allowed
- Northwest Territories – allowed
- Nova Scotia – not yet allowed
- Nunavut – not yet allowed
- Ontario – allowed (law amended June 2009, designations made on existing accounts before June are valid)
- Prince Edward Island – allowed
- Quebec – not allowed
- Saskatchewan – allowed
- Yukon Territories – not yet allowed, but legislation drafted
Unless your province or territory changes its own legislation to allow a named beneficiary on a TFSA, even though the amount will be income-tax free upon death, it might still have to go through the estate and be governed by your will, so that without a beneficiary designation, the estate may have to pay probate fees when you die. If you have a TFSA and live in a province or territory that does not yet allow beneficiary designations, you should consider amending your will to ensure your wishes are carried out.
Married couples should consider amending their wills to designate the surviving spouse as sole beneficiary of the TFSA. When the surviving spouse is named in the will as the beneficiary of the TFSA, then the investments of the TFSA may be transferred to the surviving spouse’s TFSA without affecting their contribution room. While designating the spouse as the beneficiary in the will may cause the TFSA to be included in the calculation of probate fees, the tax-free transfer is still achieved.