TFSAs and Successor Annuitants

At our last Money Monday, TFSAs with successor annuitants was discussed. Before I get into that topic, here’s a quick refresher on TFSAs. Tax Free Savings Accounts are an important part of everyone’s financial plan. I’ve always thought of them as an RRSP turned upside down. Unlike an RRSP, there is no tax deduction for deposits but withdrawals are tax free. This year, the lifetime limit is now $52,000, or $104,000 per couple. In addition, there is no maximum age for deposits; withdrawals do not affect income tested benefits such as OAS; withdrawals (including growth) can be re-deposited in the following calendar year without reducing contribution room and; all Canadian residents get the contribution room automatically. Contrasting this with RRSPs, deposits end at age 71; RRSP withdrawals are treated as income and affect income tested benefits; RRSP withdrawals can only be re-deposited if RRSP room exists or is created and; RRSP contribution room is only created when there is earned income (and the room is reduced by pension plan contributions). Now regarding successor annuitants, it is not a good idea with a segregated fund to have a successor annuitant. When an annuitant dies, the successor takes over the contract at fair market value. If there is a need for a guaranteed death benefit top-up, the top-up will not happen because a successor is in place (usually the spouse). It is much better to have the spouse be the beneficiary, receive at least the guaranteed death benefit guarantee and then deposit the proceeds into their own TFSA. CRA has a form just for the purposes of the spouse making an exempt deposit to their own TFSA (an exempt deposit means it will not be deemed an over-contribution). So, when recommending segregated funds, please consider spouses as beneficiaries on TFSAs rather than successor annuitants.

Take care, Scott Edgington Director of Wealth Qualified Financial Services 416-786-4140