In this space, sometime ago, a fellow blogger wrote about how survivor payments made out of a deceased’s tax free savings account (TFSA) to the deceased’s spouse TFSA would qualify as an “exempt contribution” (i.e. the contribution room in the surviving spouse’s TFSA would not be affected by the addition of these funds), even if the spouse was not designated beneficiary of the TFSA.
What are the implications to the determination of “survivor payment” amount and therefore designation of the “exemption contribution” amount, if the fair market value (“FMV”) of the property held in the TFSA decreases in value after death and the survivor is a beneficiary of the deceased’ estate under his or her will?
The CRA was recently asked to determine the “survivor payment” amount under various scenarios related to the above noted circumstances. The CRA confirmed that the “survivor payment” amount would be directly related to the amount paid under the TFSA to deceased’ estate and then the actual amount received by the survivor from the estate under the deceased’s will. Essentially, when the surviving spouse in this case is entitled to the whole TFSA under the will, the survivor payment is equal to the amount actually paid to the estate from the TFSA, provided the survivor’s TFSA receives an amount equal to that payment from the estate.
A couple of scenarios are outlined here to illustrate the point:
Mrs. X owned a TFSA worth $150,000 at the time of her death, say sometime in 2019. Her will provided for the entirety of her TFSA to be left to her spouse Mr. Y, and all the remainder of her property to her son, say $250,000. During the time between date of death and time of settlement of the estate, say last month (in 2020), the value of the TFSA decreased to $125,000 – a likely scenario in view of the latest international crisis. The TFSA was closed and a payment of $125,000 was paid to Mr. Y. A week later, Mr. Y contributed $150,000 to his own TFSA.
The CRA confirmed that Mr. Y’s “exempt contribution” to his TFSA could not exceed $125,000, under the definition of “exempt contribution” in the Income Tax Act (the “Act”). Therefore, the “survivor payment” would be $125,000 not $150,000 and only that amount could be designated as an exempt contribution. Mr. Y would need at least $25,000 of TFSA contribution room on his own to avoid having an excess TFSA amount.
In another scenario with similar facts to the above except that the will provided for all the remainder of the property to go to Mr. Y as well. On the same date that the $125,000 for the TFSA is paid over to Mr. Y, the $250,000 for the remainder of the property is paid to him as well.
The CRA confirmed that their interpretation of the legislation in the Act would lead to a similar result. Even if Mr. Y received $375,000 instead of $125,000 from the estate, the estate received only $125,000 from the TFSA. Mr. Y’s receiving additional funds from the estate does not change the result. The limit in the definition of “exempt contribution” in the Act remains the same, which is $125,000.
I purposely used the dates noted above to highlight a possible planning point. If the decline in FMV is temporary (e.g. directly related to the current crisis), it may be worthwhile, subject to other considerations, to wait for the FMV to recover enough to effect a transfer closer to the FMV at the time of death, before closing the account.
As featured on All About Estates Blog where Baker Tilly WM Partner, Steven Frye, is a regular contributor.
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