There are lots of tax-deferred or tax-sheltered programs in Canada today for registered accounts such as RESP, RRSP, RRIF, LIRA, LRIF, TFSA, FHSA, and RDSP. Each registered account has unique considerations regarding the consequences of the plan holder’s passing. The concept of a beneficiary is generally well understood with respect to registered accounts. However, TFSAs and RRIFs involve more complex considerations, allowing for the designation of a successor holder or a successor annuitant, respectively. Below is a discussion on the distinction between a successor holder, a successor annuitant, and a beneficiary, along with the advantages of each.

Successor Holder

A successor holder is a spouse or common-law partner who takes ownership of their partners TFSA after their partner passes away. The main advantage of naming a successor holder over a beneficiary is that the successor holder can claim the assets in the TFSA and combine the assets with their own TFSA account. This effectively increases the successor holder’s lifetime TFSA contribution room by the amount of the inherited TFSA. In contrast, a beneficiary receives the TFSA assets tax-free; however, they do not obtain the additional contribution room that a successor holder does, as they must invest the assets elsewhere. In subsequent years, the successor holder will gain additional TFSA contribution room from making withdrawals from the combined TFSA, and through the annual contribution limits set by the Canadian government.

Successor Annuitant

The successor annuitant shares many features with the successor holder, with the key difference being that the successor annuitant applies to RRIF accounts. Like the successor holder, a successor annuitant only applies to a spouse or common-law partner. When the holder of a RRIF account passes away, the successor annuitant assumes ownership of the RRIF account. In the year that the RRIF holder passes away, the RRIF account will pay the surviving partner the pre-determined RRIF draws that have been set by the deceased partner. In the following year, the successor annuitant can combine the inherited RRIF account with their own RRIF account and can then change the draw amounts, the draw frequence, and the draw timing from the combined RRIF account. If the successor annuitant is under 71, they have the option to combine the RRIF account with their RRSP account or keep the inherited RRIF account open. In comparison, a beneficiary receives the cash value of the RRIF less tax which can be substantial.

Conclusion

In most cases in which someone has a spouse or common-law partner, utilizing a successor holder for their TFSA and/or a successor annuitant for their RRIF offers many advantages. Naming a beneficiary may be a better approach if the person wants to name multiple beneficiaries or prefers funds go to people other than their spouse. Finally, where a successor annuitant or successor holder is named, it may be useful to name a contingent beneficiary, acting as beneficiary in a case where the named successor passes away.

For more information or a comprehensive analysis of your situation, please contact Burkett Asset Management Limited (250-370-0667 | [email protected]).

Disclaimer: This article is intended to inform readers in general terms. It is not intended to provide any tax, investment or business advice. Please consult your advisor if you have any questions about your unique situation. While we have tried to ensure the accuracy of the information in this article, we accept no liability for errors or omissions.