The designation you choose for your TFSA can make a significant difference in how much your loved ones receive. Here is what each option means and which to choose.
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Open KOHO Free — Code 45ET55JSYA| Feature | Successor Holder | Designated Beneficiary |
|---|---|---|
| Who can be named | Spouse or common-law partner only | Anyone (spouse, child, charity, estate) |
| What they receive | The entire TFSA — it becomes their TFSA | Fair market value of TFSA at date of death |
| Tax on FMV at death | None | None |
| Tax on growth AFTER death | None (TFSA continues tax-exempt) | Taxable — the TFSA ceases to exist |
| Affects their TFSA room | No — does not use their contribution room | Yes — to re-contribute, they need room (or exempt contribution) |
| Probate required | No | No (if named directly) |
A successor holder is a spouse or common-law partner who takes over your TFSA as their own upon your death. The TFSA does not cease — it simply transfers to the surviving spouse, maintaining its tax-exempt status with no interruption. All future growth inside the account remains tax-free. The surviving spouse does not need to have contribution room to receive it — the successor holder designation bypasses the normal contribution room rules entirely.
A designated beneficiary can be anyone — your child, another family member, a charity, or your estate. Upon your death, the TFSA's fair market value at the date of death is paid to the beneficiary tax-free. However, the TFSA account itself ceases to exist from the date of death. Any growth that occurs between the date of death and when the funds are actually distributed is taxable income to the beneficiary (or the estate). To deposit the received funds into their own TFSA, the beneficiary needs available contribution room (though there is an "exempt contribution" provision for spouses to allow a one-time deposit over their normal room).
If a spouse is named as beneficiary (not successor holder), they have a window to make an "exempt contribution" — depositing the TFSA proceeds into their own TFSA without using their normal contribution room. This must be done by December 31 of the year following the year of death, and specific CRA forms (RC240) must be completed. It is a safety valve, but the successor holder designation is simpler and protects against the interim growth tax problem.
If you die without a beneficiary or successor holder designation, your TFSA becomes part of your estate and goes through probate. The TFSA ceases to be tax-exempt from the date of death. All growth after death is taxable. Probate fees (which vary by province but can be 1–1.5% of estate value) also apply to the TFSA proceeds. This is the worst outcome and should always be avoided.
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