Tax Free Savings Account (TFSA)

Tax Free Savings Account (TFSA) - Risks for Non-Residents
Disclaimer:  This information has been assembled for general information only using what are considered to be reliable sources at the time of writing, including the CRA website. Rules may vary from province to province. You are advised to refer to a professional advisor prior to making financial or tax planning decisions.
Canadians need to be aware of the risks and opportunities that exist in managing their TFSA accounts.

Any capital gains, interest and dividends earned in Tax Free Saving Accounts (TFSA) accumulate tax free, and the proceeds of your TFSA can be passed along to any named beneficiaries without probate. Regardless of who the beneficiary is, it’s all tax-free until the point of death.

Tax Free Savings Accounts (TFSA) - Risks for Non-Residents

Canadians who are considering Non-Residency, or are already non-residents, need to be aware of the special risks that exist in managing TFSA accounts. Here are the key points:

  1. You can only open a TFSA if you are resident in Canada. Non-residents cannot open a TFSA, and in fact, non-residents generally cannot open new accounts of any type. Read about Non-Residency for more information.
  2. You can retain your TFSA while you are a non-resident and any capital gains, interest and dividends are not taxed even while you are a non-resident.
  3. You can NOT add to your TFSA after declaring non-residency. This rule may lead to tax assessments for those who leave Canada and top up their TFSA just prior to departure. See RISK #1, below.
  4. You do not accumulate TFSA room while you are a non-resident. If you return to live in Canada, you need to obtain a TFSA Contribution Room statement from CRA before you begin making deposits as a Canadian resident.
  5. You can make withdrawals at any time after departure from Canada. However, unlike a Canadian resident, you cannot replace those withdrawals while you are a non-resident.
  6. You need to ensure that the beneficiary of your TFSA (assuming it is your spouse or common-law spouse) is categorized as a “Successor Holder.” This is recommended for Canadian residents, but is especially critical for non-residents… See RISK #2, below.
  7. You should name Secondary Beneficiaries for your TFSA account, if possible. For example, you could name your spouse as “Successor Holder”, and another person (or persons) as Secondary Beneficiaries who would inherit the TFSA proceeds in the event that your spouse or partner is no longer alive.
    1. It avoids probate and is a seamless transfer of the proceeds to the Secondary Beneficiaries. Not all institutions have an option of naming Secondary Beneficiaries. Contact TioCorp if you want to set up a TFSA with Secondary Beneficiaries.

RISK #1: Topping Up Prior to Departure

It is logical to top up your TFSA immediately prior to departure, but you need to be careful. If you are issuing a cheque or transferring from another existing account into your TFSA, the transaction must be  completed, and dated, prior to the date of departure. Completing the paperwork or issuing the cheque before you leave is not enough.

If your financial advisor delays in depositing the cheque…if the institution has a delay in processing the paperwork…if the transfer between accounts is slower than anticipated…any of those things could result in the recorded date of your TFSA deposit being after your Declared Departure Date. OUCH!

If that happens, the TFSA Deposit is considered an Over-Contribution and the penalty is one percent (1%) per month from the date of the deposit, for the time that the excess funds remain in your TFSA. And don’t think it will be discovered quickly by CRA. We have seen clients who have received penalty notices years after the fact, resulting in large accumulated penalties. The only solution is to remove the over-contributed amount…only then will the accumulating penalties stop.

The Bottom Line: Top up your TFSA before you leave Canada, but make sure the transaction is actually processed and dated prior to the Date of Departure.

RISK #2: Types of TFSA Beneficiaries

You can name various types of beneficiaries (check your provincial rules):

  • Your spouse or common-law partner;
  • Any other person (or two-or-more persons) who is not your spouse or partner;
  • A charity.

There are two (2) Categories of Designations that are used on most TFSA applications. It is important to understand the differences and the implications of using one over the other. For non-residents, using the proper designation is absolutely critical.

  • Successor Holder: a surviving spouse or common-law partner can be designated on the TFSA application as a “Successor Holder”. This designation can be used for your spouse or common-law partner only... not for a charity, not for anyone else. At the time of your death, your Successor Holder automatically becomes the owner of your TFSA. Why is this important?
    • The TFSA account of the deceased is not closed and most institutions simply change the name of the owner on the account, even if the new owner is a non-resident.
    • No tax slips are issued, and there are no forms to file with CRA. It is a seamless transfer, even a transfer to a non-resident.
  • Beneficiary: This second category is usually referred to as the “Designated Beneficiary”. It be a charity; it can be anyone, including your spouse or common-law partner. DO NOT use this designation for your spouse or common-law partner. Why?
    • The TFSA account of the deceased will be closed and the proceeds are then transferred to the named “Beneficiary”. That's OK.
    • The proceeds can be transferred to a surviving spouse or partner, and CRA will not count the value of the account at the time of death as a new contribution. So far, so good.
    • HOWEVER….if the “Beneficiary” designation is used instead of “Successor Holder”, any growth in the account between the time of death and the date of transfer to the new owner is counted as a new contribution to the TFSA account. That may result in the Over-Contribution rules kicking in if the receiving spouse is non-resident at the time. Any TFSA growth after death would be considered a new TFSA contribution, something that a non-resident cannot do.
    • Another complicating factor is that a transfer to a spouse or common-law partner, using the “Beneficiary” designation requires the beneficiary submit Form RC240 to CRA within 30 days of the contribution.
      • Form RC240 is a “Designation of an Exempt Contribution Tax-free Savings Account (TFSA)”. This only covers the fair market value (FMV) as of the date of death. Fail to submit it and the entire amount, including the FMV, of the TFSA may be considered an Over-Contribution.

The Bottom Line:  Always name your spouse or common-law partner as your “Designated Survivor”, and not as your “Designated Beneficiary”.  If your TFSA already exists, ask your institution to verify that is the case. If it is not, then ask for them to update the designation immediately.  This is sound advice for all Canadians no matter where they live. You may want to forward this article to your Canadian friends.

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