Are you the recipient of a Tax-Free Savings Account (TFSA) from a deceased spouse or common-law partner? You should be aware that there may be forms to complete and timelines to be aware of. The Canada Revenue Agency (CRA) has been assessing penalties on over-contributions and exempt contributions made by survivors of deceased TFSA holders.
Background on TFSA
In 2009, the TFSA program began. It provides a way for individuals 18 years of age or older with a valid social insurance number to save money tax-free.
Contribution Limit
The contribution limit is set each year and any contributions made to the account are not deductible for income tax purposes, but any income earned in the account plus the contributions can be withdrawn tax-free. Any of the annual contribution limit that you do not use is carried forward and can be used in a future year. If you make withdrawals during the year, the total amount withdrawn is added to your contribution room at the beginning of the following year. All contributions you make during the year, including replacing prior year withdrawals, reduces your overall contribution limit.
Over-contribution
If you over-contribute to your TFSA, a 1% penalty per month will be charged on the amount of the over-contribution until you either withdraw the amount or you obtain additional room at the beginning of the following year that is high enough to clear the over-contribution. You are required to complete form RC243 Tax-Free Savings Account (TFSA) Return along with form RC243-Sch-A in order to calculate your penalty. This form and payment are due by June 30 of the following year. If this form is not filed, CRA will issue a TFSA tax assessment with their calculation of the penalty based on the information they have on record. They will also calculate a late filing penalty and interest for non-payment.
Death of a TFSA Holder
If the owner of a TFSA passes away, the tax-exempt status of the deceased stops. The TFSA may or may not continue to have a tax-exempt status depending on the type of beneficiary. If the beneficiary is not a surviving spouse or common-law partner, the TFSA changes to a regular investment account and any income earned in the account or increase in value of the account is taxable. If the beneficiary is a surviving spouse or common-law partner, the funds in the TFSA may be either transferred to their TFSA by an exempt contribution or the deceased holder’s TFSA becomes the survivor’s TFSA.
The surviving spouse or common-law partner of the deceased TFSA holder is known as a ‘survivor’.
Death of a TFSA holder – Successor holder
In provinces where a TFSA beneficiary designation is recognized, the survivor can be designated as a successor holder in the TFSA contract or in the provisions of the will. If named as the successor holder, the survivor becomes the new holder of the TFSA on the date of death. The TFSA continues to exist and the successor holder assumes ownership of the TFSA contract and the funds within the account. If the deceased did not have an excess TFSA amount at time of death, the successor holder’s unused TFSA contribution room is unaffected by taking ownership of the TFSA.
If the deceased had an excess TFSA amount at time of death, a 1% penalty tax applies to the highest excess TFSA amount for each month in which the excess existed up to and including the month of death. In addition, the successor holder is deemed to have made a contribution to their own TFSA equal to the amount of the over-contribution of the deceased. If this causes their own TFSA to have an excess amount, they will have to pay a 1% penalty for each month of the over-contribution and should follow the procedures as described in the Over-contribution section above.
It is the responsibility of the issuer of the TFSA to notify the CRA of the change of ownership.
Death of a TFSA holder – Survivor as beneficiary
If the beneficiary of the deceased TFSA is not named as a successor holder but is the survivor, they are able to contribute all or part of a survivor payment as an exempt contribution to their own TFSA without affecting their contribution room. A contribution is an exempt contribution if the amount is transferred from the deceased holder’s TFSA to the survivor’s TFSA and designated as exempt by the survivor on the prescribed form during the rollover period.
The rollover period begins when the TFSA holder dies and ends at the end of the calendar year that follows the year of death. The prescribed form on which to make the designation is RC240, Designation of an Exempt Contribution-TFSA. The form should be sent to the CRA within 30 days after the day the contribution is made. The total exempt contributions designated during the rollover period cannot exceed the fair market value of the deceased holder’s TFSA at the time of death.
The transfer of funds from the deceased’s TFSA to the survivor’s TFSA should be done as soon as possible after death, as any increase in fair market value from date of death would not be an exempt contribution.
It is important to note that it is the responsibility of the survivor to complete and submit the form to CRA for the exempt contribution.
If the survivor payment and/or contribution is made after the rollover period, no amount of the survivor payment may be designated as an exempt contribution. If it is not an exempt contribution, it will reduce the survivor’s contribution limit which could result in an over-contribution subject to a 1% penalty per month assessed by CRA.
The CRA has issued notices of assessment for penalties relating to survivor TFSA transfers made on the death of their spouse or common-law partner that were not indicated as exempt contributions on form RC240.
Waiver or cancellation of the TFSA penalties
If you are assessed penalties by the CRA, you should ensure that these penalties have been correctly charged. If they are not correct, you can object to the notice of assessment and submit documentation to support your position. If they are correct and you can establish that (i) the penalty arose as a consequence of reasonable error and (ii) that the over-contribution has been removed from the TFSA to correct the error, you should submit a request to cancel the penalties by sending a letter to the TFSA Processing Unit. The CRA has the authority to cancel penalties when both conditions are satisfied.
If you have received a notice from the CRA assessing penalties, contact your Baker Tilly advisor to discuss your options.
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