Principal Issues: 1) In situations where an individual who was the holder of several TFSAs dies leaving more than one survivor, and survivor payments are made to each survivor, does subparagraph (d)(iii) of the definition of "exempt contribution" in subsection 207.01(1) apply where the survivor payment made to each survivor come from a separate arrangement that ceased, because of the individual's death, to be a TFSA? 2) If subparagraph (d)(iii) applies, would the Minister allow an amount greater than nil in different scenarios?
Position: 1) Yes. 2) A contribution in an amount greater than nil could generally be allowed by the Minister pursuant to subparagraph (d)(iii), provided that the amount to be designated by both survivors is equal to or less than the amount that would otherwise be eligible to be designated as an "exempt contribution" under paragraph (d) of this definition, if there were only one survivor.
Reasons: 1) Wording of subparagraph (d)(iii) of the definition of "exempt contribution", which applies if payments qualifying as "survivor payment" under paragraph (b) of the definition of "exempt contribution" are made to more than one survivor, regardless of whether the survivor payments come from the same or from separate arrangements that ceased, because of the individual's death, to be a TFSA. 2) Our response to Question 15 of the Round Table on the Taxation of Financial Strategies and Instruments at the 2010 APFF Conference.
Financial Strategies and Instruments Roundtable 5 October 2012
APFF Conference 2012
Question 18 -- Spouse and common-law partner and tax-free savings account ("TFSA")
Background
In general terms, a "survivor" within the meaning of subsection 146.2(1) of the Income Tax Act (the “Act”) who is designated as a beneficiary of a TFSA in the will of a deceased individual has the option to contribute and designate all or a portion of the TFSA survivor payment as an "exempt contribution" to his or her TFSA without affecting his or her unused TFSA contribution room if the other conditions of the definition of "exempt contribution" in the Act are satisfied. It should be noted that according to the wording of the definition of "survivor" in subsection 146.2 (1), it is possible for an individual to have more than one survivor at the time of death.
At this Roundtable for the 2010 Association de planification fiscale et financière Conference ("2010 APFF Conference"), the Canada Revenue Agency ("CRA") provided clarification on what happens where the holder of a TFSA who has both a spouse and a common-law partner for the purposes of the Act dies and bequeaths to two "survivors" amounts from the TFSA according to the provisions of his or her will. Specifically, the CRA clarified that under subparagraph (d)(iii) of the definition of "exempt contribution" provided in subsection 207.01(1), it will generally allow an amount greater than nil as an "exempt contribution" provided that the total amount designated by the two survivors is less than or equal to the amount that would otherwise qualify as an exempt contribution if the deceased had only one survivor. Notwithstanding the foregoing, it is important to note that, where subparagraph (d)(iii) of the definition "exempt contribution" in subsection 207.01(1) applies. the CRA has the absolute discretion as to whether or not to allow, for each survivor, an amount greater than nil as the "exempt contribution" amount under the Act.
In addition, subparagraph (d)(iii) of the definition "exempt contribution" in subsection 207.01(1) refers to the payments described in paragraph (b) of that definition. Paragraph (b) of the definition "exempt contribution" provides that a payment directly or indirectly out of or under an arrangement (within the meaning of subsection 146.2 (1)) that ceased to be a TFSA because of the individual’s death is a "survivor payment". All or a portion of such a "survivor payment" may allow the surviving survivor to pay an "exempt contribution" to the survivor’s own TFSA, to the extent that the other conditions in the definition of "exempt contribution" are satisfied.
Under subsection 146.2(1) (applicable for the purpose of the definition "exempt contribution" in subsection 207.01(1)), a "qualifying arrangement" means in part an arrangement that is entered into after 2008 between a person (for example, a financial institution) and an individual who is at least 18 years of age (for example, the deceased).
That being said, consider the following three situations:
Situation 1
- Mr. X is legally married to Ms. X from whom he lives separate and apart without being legally divorced;
- For the purposes of the Act, Ms. Y is the common-law spouse of Mr. X;
- Mr. X holds a TFSA account in the amount of $20,000 with a Canadian financial institution;
- In 2012, Mr. X dies and bequeaths, according to the terms of his will, an amount of $15,000 and an amount of $5,000 out of his TFSA to Ms. X and Ms. Y, respectively;
Situation 2
- Mr. X is legally married to Ms. X from whom he lives separate and apart without being legally divorced;
- For the purposes of the Act, Ms. Y is the common-law spouse of Mr. X;
- Mr. X holds two TFSA accounts with two financial institutions: A TFSA account in the amount of $15,000 ("TFSA No. 1") and another TFSA account in the amount of $5,000 ("TFSA No. 2");
- In 2012, Mr. X dies and bequeaths, under the provisions of his will, TFSA No. 1 to Ms. X and TFSA No. 2 to Ms. Y;
Situation 3
- Mr. X is legally married to Ms. X from whom he lives separate and apart without being legally divorced;
- For the purposes of the Act, Ms. Y is the common-law spouse of Mr. X;
- Mr. X holds two TFSA accounts with a Canadian financial institution: A TFSA account in the amount of $15,000 ("TFSA No. 1") and another TFSA account in the amount of $5,000 ("TFSA No. 2");
- In 2012, Mr. X dies and bequeaths, under the provisions of his will, TFSA No. 1 to Ms. X and TFSA No. 2 to Ms. Y;
Questions to the CRA
Situation 1
Based on your position at the 2010 APFF Convention, will the CRA use its discretion to allow Ms. X and Ms. Y to designate the entire TFSA survivor payments they received ($15,000 and $5,000, respectively) as an "exempt contribution" for the purposes of subparagraph (d)(iii) of the definition in subsection 207.01(1) since the total amount ($20,000) to be designated by Ms. X and Ms. Y (the two survivors) would be equal to the amount that would otherwise be eligible for the exempt contribution designation, by virtue of paragraph (d), if there were only one survivor (being $20,000)?
Situation 2
Can you confirm that Situation 2 described above is not covered by subparagraph (d)(iii) of the definition of "exempt contribution" in subsection 207.01(1) since TFSA No. 1 and the TFSA No. 2 are two separate "arrangements" by virtue of subsection 146.2(1)? If this is your position, we understand that if the other conditions of the definition of "exempt contribution" are satisfied, Ms. X and Ms. Y will each be able to designate the entire TFSA survivor payment as an "exempt contribution" to their TFSA without affecting their unused TFSA contribution room, and without CRA exercising its discretion set out in subparagraph (d)(iii) of the definition in subsection 207.01(1).
Situation 3
Since two TFSA accounts were opened with a financial institution, will there be two separate "arrangements" under subsection 146.2(1)? If yes, can you confirm that subparagraph (d)(iii) of the definition "exempt contribution" in subsection 207.01(1) will not apply to Situation 3 as described above and consequently, if the other conditions of the definition of "exempt contribution" are satisfied, Ms. X and Ms. Y will each be able to designate the entire TFSA survivor payment as an "exempt contribution" to their TFSA without affecting their unused TFSA contribution room, and without CRA exercising its discretion under subparagraph (d)(iii) of the definition in subsection 207.01?
If subparagraph (d)(iii) of the definition "exempt contribution" in subsection 207.01(1) were applicable to Situation 3 described above, can you confirm that the CRA would use its discretion to allow Ms. X and Ms. Y to designate the entire TFSA survivor payment they received as an "exempt contribution” for the purposes of subparagraph (d)(iii) of the definition of subsection 207.01(1) since the total amount ($20,000) to be designated by Ms. X and Ms. Y (the two survivors) would be equal to the amount that would otherwise be eligible for the exempt contribution designation, by virtue of paragraph (d), if there were only one survivor (i.e., take the same position as stated at the 2010 APFF Conference)?
CRA Response
For the purposes of this response, and in order to simplify the discussion, we have assumed that the values of the various TFSA accounts described in the three situations listed represent the respective fair market value ("FMV") of each of the accounts immediately prior to death of Mr. X and at the time of distribution to Ms. X and Ms. Y. We have also assumed that the amounts paid to Ms. X and Ms. Y, as the case may be, are paid to them in one payment. In other words, we understand that in each of the situations listed, Ms. X would receive a single "survivor payment" of $15,000, and Ms. Y would receive a single "survivor payment" of $5,000.
Where a survivor within the meaning of subsection 146.2(1) pays, in any calendar year, a contribution to the survivor’s TFSA in circumstances that satisfy the conditions of paragraphs (a), (b) and (c) of the definition "exempt contribution" in subsection 207.01(1), paragraph (d) of the same definition limits the amount of the contribution that qualifies as an "exempt contribution" to the lesser of three amounts determined under subparagraphs (d)(i), (ii) and (iii).
Subparagraph (d)(i) of the definition of "exempt contribution" essentially has the effect of limiting the amount of the exempt contributions that may be paid in relation to a particular survivor payment (within the meaning of paragraph (b) of that definition) to the amount of that payment.
Subparagraph (d)(ii) of the same definition essentially has the effect of limiting the amount of the exempt contributions that may be paid in respect of a particular arrangement to the FMV of that arrangement immediately before the death of the holder.
Subparagraph (d)(iii) of the same definition essentially has the effect of limiting, in certain circumstances, the amount of the exempt contributions that may be made in respect of all the arrangements that were, before the death of a particular individual, a TFSA of which that individual was the holder. This provision applies where the particular individual had an excess TFSA amount or if payments that qualify as survivor payments within the meaning of paragraph (b) of that definition are made to more than one survivor of the particular individual. Where this provision applies, the amount qualifying as an "exempt contribution" is generally limited to nil, unless the Minister allows a greater amount.
For example, subparagraph (d)(iii) of the definition "exempt contribution" in subsection 207.01(1) applies, inter alia, where payments described in paragraph (b) of that definition are made to more than one survivor of a particular individual, regardless of whether those payments originated from one or more arrangements that ceased to be TFSAs of the particular individual.
In the three situations described, and assuming the other conditions are satisfied, both the payment received by Ms. X and the payment received by Ms. Y would be a "survivor payment" described in paragraph (b) of the definition of "exempt contribution". It follows that subparagraph (d)(iii) of the definition "exempt contribution" in subsection 207.01(1) would find application in all three situations.
This being the case, as indicated at the 2010 APFF Conference, a contribution of an amount greater than nil could generally be allowed by the Minister under subparagraph (d)(iii), provided that the total amount to be designated by Ms. X and Ms. Y is less than or equal to (but not greater than) the amount that would otherwise qualify for the designation "exempt contribution" under paragraph (d) of that definition, if there was only one survivor.
Thus, in the three situations described, the respective $15,000 and $5,000 contributions of Ms. X and Ms. Y could generally be allowed, as indicated at the 2010 APFF Conference.
Response prepared by:
Mélanie Beaulieu
(613) 957-9226
2012-045317