Kevin Greenard: Understanding TFSA beneficiary terminology

Kevin Greenard

The Tax Free Savings Account (TFSA) is a registered account. One of its features is the ability to name a beneficiary.

When we are opening a TFSA for a client, they must advise us who they would like to name as a beneficiary. Common beneficiaries are a spouse, children, charity or estate.

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Before diving into this choice, it is worth explaining some of the tax rules and some of the terminology.

This is particularly important if you have a spouse or common-law partner. If you do not have a spouse or common-law partner, you should still read on to understand all of your options.

The choice is not always straight forward, especially with couples having been in multiple marriages with children from one of those previous relationships. Loyalty toward children from a previous relationship versus the tax benefits of naming a current spouse is an obvious conflict.

The term beneficiary really applies to every TFSA owner. Essentially, what you are saying is that if you were to pass away who do want to receive the value in your TFSA?

If you have a spouse or common-law partner, you should understand the beneficiary term “successor holder.”

If you name your spouse or common-law partner a successor holder, your spouse will essentially take over your TFSA if you pass away. The mechanics of how this is done is relatively straight forward. After we obtain a copy of the death certificate, we would change the name on the account to the surviving spouse. All holdings within the account stay exactly the same. In the majority of cases, we then have the surviving spouse sign a letter of direction to combine both accounts. At the same time we typically talk about who the surviving spouse wishes to now name as a beneficiary.

The obvious big benefit is that the surviving spouse obtains the additional TFSA room. Contributing early to the TFSA is typically recommended, and also has benefits in the year a spouse passes away. If a spouse had already contributed to a TFSA in January and passes away in February then the surviving spouse would obtain the additional room. If the deceased has not yet made a contribution, then there is no provision under the Income Tax Act to contribute afterwards and the opportunity is lost. This applies to the current year limit and any potential unused TFSA contribution room.

The surviving spouse will be able to avoid any future income tax on the growth of the combined amount. For couples in a first relationship, this choice is pretty obvious. For other couples, the choice is not always straight forward.

For everyone else, other than a spouse or common-law partner, the term beneficiary is used. The named beneficiary would receive the value of your TFSA, but would not receive the additional TFSA room.

Another beneficiary term that can be applicable to TFSA accounts is “contingent beneficiary.”

Essentially, a contingent beneficiary is a second level of beneficiaries if the primary beneficiary is pre-deceased. Perhaps the best way to understand this term is looking at a couple of different scenarios.

What would happen if you and your spouse passed away in an accident? Both of your TFSA accounts would be naming each other. If this couple had named their two children as contingent beneficiaries, then even in the worst case scenario, the accounts would be documented according to your wishes.

In order to update and sign legal documents, including beneficiary forms, you must have capacity. Using the scenario of an aging couple, they understand that if their health deteriorates much further they may not have the ability to make changes if either of them passes away.

In the scenario above, in talking about successor holder I outlined a scenario where the surviving spouse had capacity and could name new beneficiaries on the TFSA account. What if the surviving spouse did not have capacity? If they had set up contingent beneficiaries, then the accounts would be documented according their wishes. This takes the concern of the surviving spouse losing capacity and subsequently passing away.

If you are single or widowed you may also name both a primary beneficiary and a contingent beneficiary. The mechanics of how this is done is through a signed letter of direction listing the contingent beneficiaries.

One of the benefits of naming beneficiaries on registered accounts is that it is relatively straight forward to do. Unlike updating your will, changing the beneficiaries on registered accounts does not cost anything. It is important to ensure that both the beneficiaries on registered accounts and what you have outlined in your will are consistent and do not conflict.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at Call 250-389-2138.

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