The Tax-Free Savings Account program was introduced in 2009. As of January 1, 2013, every Canadian who was 18 years of age or older in 2009 will be eligible to have contributed a total $25,500 to his or her TFSA. For a couple, this represents a combined eligibility of $51,000. Furthermore, this eligibility will continue to increase each subsequent January, by another $5,500 per person – an increase of $500 annually over previous annual adjustments.
Some 75 per cent of Canadians have either not yet embraced the advantages of a TFSA, or maximized contribution limits.
If you are holding non-registered investments, consider transferring as much as possible of the cash value to your TFSA. You may then reinvest in exactly the same financial instruments which you previously held outside the TFSA.
There is no downside to topping up your TFSA eligibility. You continue to have full access to the holdings. They can grow through interest, dividends or capital gains — on a totally tax-free basis.
As part of an estate, TFSA accounts are not subject to probate or other taxes. Couples may designate one another as “successor holder. This designation on a TFSA allows the automatic transfer of the deceased’s holdings to the surviving partner’s TFSA — with no restrictions. Essentially, on the death of one partner, the government considers the transaction as an extra, eligible one-time contribution.
Wendy Everson, a Sidney lawyer who assists clients with estate planning, confirms that she frequently encounters clients who have not included the TFSA in their estate planning or have not taken full advantage of the program, including the naming of beneficiaries.
From an estate perspective, she has seen situations in which a surviving spouse, acting as executor, was unable to avoid the time and cost of obtaining probate on a deceased partner’s TFSA, only because the couple had failed to open their TFSAs with the “successor holder” designation.
As a result, the funds from the TFSA were paid directly to the estate, requiring the executor to apply for probate, and for the estate to pay, among other expenses, probate fees.
Aside from the cost and delay, the survivor was also unable to combine the two TFSAs into one larger holding.
Only couples may designate one another as “successor holder” on a TFSA. All others can and should name specific beneficiaries, including for multiple beneficiaries, the proportion they wish to allocate to each. For example, the last surviving parent may designate an equal share to each named child. In this case, probate is avoided and the proceeds of the TFSA will be paid out tax-free, directly to the beneficiaries.
TFSAs are a great innovation. They assist Canadians in achieving tax-free capital growth and wealth-preservation.
If you have not yet taken full advantage of this opportunity, consider doing so at your earliest opportunity. When you do, be sure to pay particular attention to the correct designation of your beneficiary.
A retired corporate executive, enjoying post-retirement as a financial consultant, Peter Dolezal is the author of three books. His most recent, The Smart Canadian Wealth-Builder, is now available at Tanner’s Books, and in other bookstores.