A Tax-Free Savings Account is a powerful tool, in part, because you can contribute to it until the day you die. It can also be a very tax-efficient way to pass along assets to a loved one. Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Kim Parlee to highlight some ways to ensure your heirs get the benefit of your good planning.
Print Transcript
[AUDIO LOGO]
* The Tax-Free Savings Account is a popular tool for saving and withdrawing money tax-free. It's powerful, in part, because there's no age limit to when you have to stop contributing. You can use it until the very end, if you will. And if you're smart about it, it can be a tax-efficient way to pass along assets to a loved one.
* Nicole Ewing is director of tax and estate planning at TD Wealth. She joins me now to dig into some of the key things to consider as you plan out the future of your TFSA and where you want it to go. Nicole, how are you?
* I'm great. Thanks, Kim.
* Let's start with this. Why would you might want to have a specific plan for your TFSA when you pass away?
* OK, so we say specific plan, but as always, we want it to be part of our overall plan that we're making. But specifically with our TFSA, there's such an ease of administration. If we have that successor holder or beneficiary named, it can pass very quickly upon death to the person that you intend.
* It can also save some income tax. If it's done properly, it can save continuing income tax. And then, of course, probate tax. So in those provinces where probate tax applies or estate administration tax applies, if we name that beneficiary, it's going to flow outside of our estate, and we won't have to pay that. In Ontario, 1.5%. And so it can add up pretty quickly.
* Let's talk about, then, when you said if it's done properly. What is the right way to do that, then?
* Well, so on death, of course, we are deemed to have disposed of all of our assets, and we need to pay tax on those. What's different with a TFSA, of course, is that we have tax-free withdrawals, which includes at death. We have that no taxes included in our income.
* So we receive, as the deceased individual, the amount tax-free. But if we name our spouse, including a common law partner, as our successor holder, they can actually continue this account and continue to receive that tax sheltering into the future. So it's a very effective strategy.
* What are some of the key things that you should be doing when you're laying out your estate planning with regards to your TFSA? I mean, to make sure that it's done in the way that you're saying?
* Well, so we want to firstly step back and think of what we're trying to achieve, of course. But then there's some really specifics where we can get tripped up. So number one I would say is the financial institutions form. And we can take for granted that filling in our beneficiary, our contingent beneficiaries, we know what that result will be.
* I would ask you to please pause and look at the form. Look at the language specifically because it changes between financial institutions, so it's not necessarily going to give you the same result that you expect. We also want that, of course, to be coordinated with any will that we have in place, make sure that we're not confused about which designation would apply.
* We want to think about contingent beneficiaries. So we might know who we want to name primarily, but what if someone happens to them? Who are we naming, and do we have the appropriate things in place to make sure that they're receiving those funds? So for example, minor beneficiaries, are they receiving the money in trust, or if we name them directly, will they have to wait until age 18 to receive those funds?
* And then another one we see, which unfortunately we can lose some money this way, is by naming a non-resident beneficiary because, that way, we will have withholding tax on those funds. So you might want to leave the TFSA to somebody within Canada, who's a resident here, and perhaps give some other assets to those non-resident beneficiaries.
* Hm. That's interesting. What about-- I know that I saw some language, and you were talking about the importance of watching the language between designating a successor holder or a beneficiary, or both. I mean, what's the difference between the two?
* So with the TFSA, we have the opportunity to name our spouse or common law partner as the successor holder. And essentially, what that means is upon our death, they step into our shoes. They take over the account. There is no disposition. Simply their name attaches to it, and they can continue to have that account to do tax-free withdrawals, tax-free contributions.
* And it happens immediately at death. So any income earned after your death is also going to be protected and tax-sheltered. If you name a beneficiary-- and you can name a spouse as a beneficiary-- they have the option of using what's called an exempt contribution to get that similar result.
* But the difference between the beneficiary and successor holder is that time between the death and the time that the new person takes over. So if you're named as a beneficiary as a spouse and you do that exempt contribution, you might still have some tax to pay for that gap, and if there's earnings between the time of death and the time that you had your new TFSA account set up. So we want to be mindful there.
* But when it comes to a beneficiary, we can really name anybody. We can name our children. We can name our ex-spouses, depending on whether that might make sense for our child-rearing purposes. We can really name anybody. But only your spouse can be a successor holder. And it's a very, very powerful tool.
* It is. I was going to say, it's by far the most efficient. Now, let me ask you this. If you pass away and you name your spouse as the successor holder, but they already have their own TFSA, does that impact that?
* No. It's great news. It's great news because we can have those two accounts separately. So when I receive my spouse's account as successor holder, it does not impact my contribution room at all. I can essentially have those two accounts set up. If I prefer, I can transfer between them.
* Again, it's a contribution that you're allowed to make between your own TFSA accounts. So no harm done. But it might allow you to have a little bit more of a-- sort of from an administrative perspective, if you want to do something different with that account than you want to do with your own, perhaps any excess going to your spouse's children if they're from a different marriage, it does allow you some control to have those two accounts set up. But ultimately, it's at your discretion which one you'd like to do.
* Nicole, I've only got about 15 seconds, but we always have to end with this because it's important. People probably do need to talk to somebody, though, get some advice on this because it's for all those things you said at the beginning. It's not straightforward. You may want to leave one thing to somebody in Canada and someone else abroad. You've really got to plan the whole thing.
* You do. And this is where your lawyer and your tax accountant and your financial planner and advisor can work together to help you come up with that plan. You might want to have assets flowing to a testamentary trust. You might want to have assets going into your estate to pay the tax bill.
* So there's a lot of things to consider when we're naming. It's always great to have a plan, name a beneficiary if appropriate. But there's always circumstances where that the estate might be the right choice. So this is where the professionals can really help you figure out what's best for you.
[AUDIO LOGO]
[MUSIC PLAYING]
* The Tax-Free Savings Account is a popular tool for saving and withdrawing money tax-free. It's powerful, in part, because there's no age limit to when you have to stop contributing. You can use it until the very end, if you will. And if you're smart about it, it can be a tax-efficient way to pass along assets to a loved one.
* Nicole Ewing is director of tax and estate planning at TD Wealth. She joins me now to dig into some of the key things to consider as you plan out the future of your TFSA and where you want it to go. Nicole, how are you?
* I'm great. Thanks, Kim.
* Let's start with this. Why would you might want to have a specific plan for your TFSA when you pass away?
* OK, so we say specific plan, but as always, we want it to be part of our overall plan that we're making. But specifically with our TFSA, there's such an ease of administration. If we have that successor holder or beneficiary named, it can pass very quickly upon death to the person that you intend.
* It can also save some income tax. If it's done properly, it can save continuing income tax. And then, of course, probate tax. So in those provinces where probate tax applies or estate administration tax applies, if we name that beneficiary, it's going to flow outside of our estate, and we won't have to pay that. In Ontario, 1.5%. And so it can add up pretty quickly.
* Let's talk about, then, when you said if it's done properly. What is the right way to do that, then?
* Well, so on death, of course, we are deemed to have disposed of all of our assets, and we need to pay tax on those. What's different with a TFSA, of course, is that we have tax-free withdrawals, which includes at death. We have that no taxes included in our income.
* So we receive, as the deceased individual, the amount tax-free. But if we name our spouse, including a common law partner, as our successor holder, they can actually continue this account and continue to receive that tax sheltering into the future. So it's a very effective strategy.
* What are some of the key things that you should be doing when you're laying out your estate planning with regards to your TFSA? I mean, to make sure that it's done in the way that you're saying?
* Well, so we want to firstly step back and think of what we're trying to achieve, of course. But then there's some really specifics where we can get tripped up. So number one I would say is the financial institutions form. And we can take for granted that filling in our beneficiary, our contingent beneficiaries, we know what that result will be.
* I would ask you to please pause and look at the form. Look at the language specifically because it changes between financial institutions, so it's not necessarily going to give you the same result that you expect. We also want that, of course, to be coordinated with any will that we have in place, make sure that we're not confused about which designation would apply.
* We want to think about contingent beneficiaries. So we might know who we want to name primarily, but what if someone happens to them? Who are we naming, and do we have the appropriate things in place to make sure that they're receiving those funds? So for example, minor beneficiaries, are they receiving the money in trust, or if we name them directly, will they have to wait until age 18 to receive those funds?
* And then another one we see, which unfortunately we can lose some money this way, is by naming a non-resident beneficiary because, that way, we will have withholding tax on those funds. So you might want to leave the TFSA to somebody within Canada, who's a resident here, and perhaps give some other assets to those non-resident beneficiaries.
* Hm. That's interesting. What about-- I know that I saw some language, and you were talking about the importance of watching the language between designating a successor holder or a beneficiary, or both. I mean, what's the difference between the two?
* So with the TFSA, we have the opportunity to name our spouse or common law partner as the successor holder. And essentially, what that means is upon our death, they step into our shoes. They take over the account. There is no disposition. Simply their name attaches to it, and they can continue to have that account to do tax-free withdrawals, tax-free contributions.
* And it happens immediately at death. So any income earned after your death is also going to be protected and tax-sheltered. If you name a beneficiary-- and you can name a spouse as a beneficiary-- they have the option of using what's called an exempt contribution to get that similar result.
* But the difference between the beneficiary and successor holder is that time between the death and the time that the new person takes over. So if you're named as a beneficiary as a spouse and you do that exempt contribution, you might still have some tax to pay for that gap, and if there's earnings between the time of death and the time that you had your new TFSA account set up. So we want to be mindful there.
* But when it comes to a beneficiary, we can really name anybody. We can name our children. We can name our ex-spouses, depending on whether that might make sense for our child-rearing purposes. We can really name anybody. But only your spouse can be a successor holder. And it's a very, very powerful tool.
* It is. I was going to say, it's by far the most efficient. Now, let me ask you this. If you pass away and you name your spouse as the successor holder, but they already have their own TFSA, does that impact that?
* No. It's great news. It's great news because we can have those two accounts separately. So when I receive my spouse's account as successor holder, it does not impact my contribution room at all. I can essentially have those two accounts set up. If I prefer, I can transfer between them.
* Again, it's a contribution that you're allowed to make between your own TFSA accounts. So no harm done. But it might allow you to have a little bit more of a-- sort of from an administrative perspective, if you want to do something different with that account than you want to do with your own, perhaps any excess going to your spouse's children if they're from a different marriage, it does allow you some control to have those two accounts set up. But ultimately, it's at your discretion which one you'd like to do.
* Nicole, I've only got about 15 seconds, but we always have to end with this because it's important. People probably do need to talk to somebody, though, get some advice on this because it's for all those things you said at the beginning. It's not straightforward. You may want to leave one thing to somebody in Canada and someone else abroad. You've really got to plan the whole thing.
* You do. And this is where your lawyer and your tax accountant and your financial planner and advisor can work together to help you come up with that plan. You might want to have assets flowing to a testamentary trust. You might want to have assets going into your estate to pay the tax bill.
* So there's a lot of things to consider when we're naming. It's always great to have a plan, name a beneficiary if appropriate. But there's always circumstances where that the estate might be the right choice. So this is where the professionals can really help you figure out what's best for you.
[AUDIO LOGO]
[MUSIC PLAYING]