Principal Issues: Whether an amount paid out of an arrangement that ceased to be a TFSA upon the death of its last holder to the deceased holder's estate and distributed by the estate executor to the deceased's surviving spouse in satisfaction of a bequest of a sum of money would qualify as a survivor payment for the purposes of the definition of "exempt contribution"?
Position: Generally yes, provided that the distribution is in accordance with the terms of the deceased's will and it is made during the rollover period.
Reasons: When such an amount is distributed in accordance with the terms of the deceased holder's will, the CRA will generally consider that such amount is distributed as a consequence of the death of the deceased holder, consistent with paragraph 248(8)(a).
XXXXXXXXXX 2016-067975 Mélanie Beaulieu May 11, 2017
Dear XXXXXXXXXX,
Subject: Tax-Free Savings Account ("TFSA") on Death
This letter is in response to your e-mail of December 9, 2016, asking whether the transfer of funds from a deceased holder's TFSA to the holder's surviving spouse in order to pay a specific legacy of a sum of money can satisfy the definition for "exempt contribution" under subsection 207.01(1) of the Income Tax Act (the "Act"). Specifically, your question pertains to paragraph (b) of that definition.
In this regard, you described a situation where the deceased's will provided for a specific legacy of a sum of money to the surviving spouse. Although the will did not specifically provide for the legacy in favour to the spouse to come out of the TFSA, the executor wishes to pay the specific legacy with a sum of money out of the proceeds of the TFSA. We understand that no valid beneficiary designation could be made under the TFSA, and that there was no provision in the deceased's will specifying to whom the TFSA would pass. We also understand that under the will of the deceased, the executor has the discretion to determine from which property of the estate the executor may pay the specific legacies. You wish to confirm that in such circumstances, the payment to the surviving spouse by the executor during the rollover period would satisfy subparagraph (b) of that definition.
Unless otherwise indicated, all legislative references in this letter are to the provisions of the Act.
Our Comments
This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
In order to satisfy paragraph (b) of the definition "exempt contribution" in subsection 207.01(1), a payment derived directly or indirectly out of or under an arrangement that ceased, because of the individual’s death, to be a TFSA (footnote 1) must be made to the survivor during the rollover period, as a consequence of the individual’s death. Such a payment is termed a "survivor payment" in the "exempt contribution" definition.
For a payment made to a survivor during the rollover period to be a survivor payment, the following conditions must be met: (1) it is made, directly or indirectly out of or under an arrangement that ceased, because of the death of the last holder, to be a TFSA; and (2) it is made as a consequence of the individual’s death.
The derivation of the payment is generally a question of fact. Taking into account the words "directly or indirectly", a particular payment may qualify as a survivor payment whether the money is paid directly to the survivor under the arrangement or it is first paid to the executor of an estate before being paid by the executor to the survivor.
As to whether the payment is made as a result of the death of the individual, paragraph 248(8)(a) provides, among other things, that a transfer, distribution or acquisition of property made under or as a consequence of the will of a taxpayer or as a result of such will is considered a transfer, distribution or acquisition of property as a consequence of the death of the taxpayer. Thus, to the extent that the payment to the surviving spouse is made in accordance with the individual's will, the CRA would generally be of the view that it is a payment made as a consequence of the individual's death. The fact that the will provides for legacy of a sum of money to the surviving spouse rather than specifically providing a legacy of all or part of the TFSA would not in itself prevent the payment from being a survivor's payment for the purposes of the definition of "exempt contribution," to the extent that the executor has the authority under the will to satisfy the legacy out of the money that was held under the TFSA.
We hope that our comments are of assistance.
Louise J. Roy, CPA, CGA
Manager
for the Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Due to our system requirements, the footnotes contained in the original document are shown below instead:
1 Pursuant to paragraph 146.2(5)(a), a TFSA ceases to be a TFSA at the time at which last holder of the arrangement dies. Although subsection 146.2(9) deems the arrangement to continue to be a TFSA until the end of the exemption-end time for the purposes set out in that subsection, that provision does not apply for the purposes of the definition of "exempt contribution" under subsection 207.01(1).