Spousal rollover … or not?

To defer, or prefer to incur

After a good long run, dad died midway through his 99^th year. Mom and we kids will miss him dearly – they actually called each other “dear” – but it was his time.

Mom is nearing the mid-90s herself. Customarily, everything would roll to her to get around the tax on deemed dispositions at death that would otherwise erode dad’s estate, of which mom is the sole beneficiary – But could we do better for her?

It’s one of those mantras of financial planning to arrange beneficiary designations and joint accounts to allow streamlined continuity to a spouse. Even so, it’s equally important to pause and consider whether to opt out, particularly for deaths early in the year. Dad died in January, so with only a couple weeks of income, there remains plenty of room to make use of his basic personal credit and low bracket tax rates.

Following are some steps we undertook, along with the odd snag along the way.

Pension rollover

To begin, notice was given to the administrator of the defined benefit pension that was their primary income source. As surviving spouse, mom will continue with a reduced pension, emphasizing the need to be tax-conscious with her other income sources. There won’t be any residual value when she dies, but with the two of them living well into their nineties, they got their fair actuarial share out of the deal.

RRIF on death

Mom handled the house when we were youngsters, followed by a lengthy run as a school trustee. Dad took early retirement at 60, then kept busy with teaching and consulting gigs into his 70s. Thus, despite having a dependable pension, both had moderate accumulation in registered retirement income funds (RRIFs), each naming the other as beneficiary. Their financial advisor (a friend to us all) readied the paperwork to roll dad’s RRIF to mom.

Acting under power of attorney (POA), we instead declined the receipt of the RRIF on mom’s behalf. Accordingly, the amount will be included in dad’s final year income, soaking up the remainder of his basic personal credit
(i.e., at zero tax), with the rest tagged with the lowest bracket rate.

RRIF minimums

In their later years, we have been managing their finances under POA. This included instructing on taking the minimum RRIF withdrawal early in the year. That meeting was still in the upcoming calendar when dad died.

The RRIF minimum, based on the preceding year-end value, is required to be paid in the following calendar year. Per CRA and the administrator’s practice, as it had not been paid before dad’s death, that portion had to be paid and taxed to mom as the named beneficiary (though again as noted above, the bulk had been declined, to be taxed in dad’s final year).

TFSA rollover

One great thing about a TFSA rolling to a spouse is that it continues to be a TFSA, without requiring or using up the receiving spouse’s TFSA room. Notably, unused TFSA room does not roll to a spouse, nor to anyone else for that matter. Fortunately, mom and dad were consistent TFSA contributors, with the combined amounts now being with mom, except for the lost room for dad’s final year due to the contributions not having yet been made.

(Not) naming beneficiaries under POA

For registered accounts in Ontario (and most common law provinces), attorneys under POA cannot initiate or change beneficiary designations. However, many financial institutions will carry over an existing designation on an incoming registered plan, which was helpful as we were consolidating their financial holdings when their faculties had significantly declined.

Unfortunately, dad had one small TFSA without a designation. As we could do nothing about it, probate was inevitable for dad’s estate. On the bright side, it bolstered our decision to allow the RRIF to fall into the estate, with the projected income tax savings well exceeding the nominal bump in probate tax.

Joint non-registered account

The proceeds from their home sale years ago went into mom and dad’s joint non-registered investment account. That’s helped service their later accommodations, while also appreciating nicely. Probate was bypassed at dad’s death, with mom continuing as sole legal and beneficial owner by right of survivorship.

By default, capital property rolls at adjusted cost base (ACB) to a spouse on death. This applies when held through a joint account as in this case, or if dad had an account under his name alone that was then migrated to mom as estate beneficiary (as long as the individual securities in the account were not sold in the process).

Alternatively, dad’s estate can elect out of the automatic rollover, on a per-property basis. This will allow us to optimize for mom’s future needs by choosing which securities to rollover, and which to have taxed in dad’s final return. As mom could conceivably blow right past dad, the century mark and beyond … that extra financial flexibility will be welcome comfort for her as she moves into this next chapter.

Money for your matrimony

Planning your wedding on a firm financial footing

You’re in love, and you’re ready to take the plunge into marriage – congratulations! But maybe take a deep breath before diving in. That’s not a comment on your relationship, but an alert that if you’re not fully prepared, you could land in a deep financial hole as you begin your life together. Here are some tips to keep in mind as you begin planning for your special day.

Do your research, then create a checklist before you start spending

As much as your parents can tell you how it was done in their day, that was literally a generation ago. A quick internet search reveals that the average cost of a wedding in Canada could push past $20,000. Use your next search to find a good checklist that outlines the major decisions involved so you’re prepared to deal with them.

Set a date based on your time availability to reach it from today

We humans don’t make our best decisions when we are under pressure. Why invite anxiety by setting a date that compresses your ability to properly explore and vet your options? With checklist in hand, visualize how you will juggle those many tasks based on your available schedule, add a couple months, then set a date you can meet.

Use a budget, and do sweat the small stuff

You now have enough to work with to set a budget, at least with estimates based on large categories of expenses: hall rental, photographer (does this generation even bother anymore?), flowers, etc. This is a living exercise where you will learn and adjust at each step along the way. And be vigilant on the so-called small stuff; an extra buck or two for each trinket multiplied by 30 (or 300?) guests adds up quickly – plus HST!

Route your money through a single savings account

I should have mentioned that saving regularly will have served you well to accumulate at least some of what you will need. Then use that same account to monitor your spending progress. Whether it’s paid by the principal participants or their parents, and whether you use cash, debit, cheque, credit, e-transfer, or any other method … routing the money through one account makes tracking – and adjusting – more manageable.

Using credit may be inevitable, but plan how you’ll pay it back

Even with the best planning, you will likely require some debt to pull it all together, whether that’s supplier accounts, a credit card balance, formal loans or personal IOUs. Before the big day arrives, try to estimate how long it will take to pay it off, then get to it in earnest once you’re back from the honeymoon and settled.

While it may seem unromantic to focus too much on the finances, a well-considered plan will allow you to be fully in-the-moment on your wedding day, which is the best gift you can give to your new better half.

TFSA tax exposure if spouse is not successor holder

Executors need to avoid delays, else unexpected taxes arise

From its humble beginning in 2009 and that first $5,000 of contribution room, the Tax-Free Savings Account (TFSA) has grown to become an increasingly important component of our savings. Annual room for Canadian residents age 18 and over is $7,000 in 2024, with cumulative room up to $95,000 for those who were eligible in 2009, which means investment accumulation could be well into six figures.

And the investment accumulation could be double that for couples who can use the survivor rollover rules on death without affecting the TFSA room of the spouse/common-law partner (CLP). The qualifying rollover amount is the lesser of the TFSA’s fair market value (FMV) at death and the amount paid to the survivor. It’s a generous feature, but the “lesser of ” constraint can be problematic, in addition to tax leakage when income is earned while awaiting transfer to the survivor.

Though these concerns may be minimal if the transfer happens quickly, they can become costly if the proceeds go through an estate, particularly when there are delays in administration. Fortunately, there are some things an executor can do to limit the risk.

Taxable events

It may seem odd to think of a TFSA as taxable, given its name. But it can happen, either through over-contributions during the holder’s life, or following the holder’s death. For couples, the easiest solution in the case of death is to designate the spouse/CLP (the survivor) as successor holder, either on the plan or through the holder’s will. The TFSA continues to exist in its current form, with the survivor carrying on as its new holder.

The use of a beneficiary designation does not have the same continuity effect, even if the survivor is the beneficiary. Such designation assures that the plan proceeds go to whoever is named, including avoiding probate tax in provinces where that is an issue. But income tax will still apply on earnings after death.

A TFSA may be in the form of a deposit, annuity, or trust. For deposits and annuities, the holder’s death causes a disposition of the TFSA at FMV, with any subsequent earnings taxable to the beneficiary(ies) or estate.

TFSA trusts

A TFSA trust continues as a non-taxable trust after the holder’s death. Though this sounds like a positive result, it simply means that any income arising after death will not taxed be to the TFSA trust, but rather to the beneficiaries when the TFSA is distributed to them. However, if the TFSA trust has not been distributed by December 31 of the year after the year of death, known as the “rollover period”, it is deemed disposed, with all after-death growth and income taxed to the trust – at top tax bracket!

As the owner of a TFSA can name a successor holder or beneficiary, one might ask why a TFSA would end up in an estate. Apart from Quebec (where one cannot legally make such designations), the simplest answer is that the holder may not have been aware of this option, or that the named person is pre-deceased.

Alternatively, it may be a conscious intention to allow for the TFSA to fall into the estate to be managed according to the terms of the will. This may be a strategic move to provide more flexibility in caring for heirs, possibly driven by mixed family considerations, a late-life marriage, disability issues, spendthrift concerns, charitable planning, or just general liquidity.

Whatever the reason, the executor now has control, so what then can be done — and why?

Risks and responses

With the understanding that the executor’s first obligation to the estate is legal in nature, these tax issues offer extra impetus to obtain the official appointment as executor without delay. Within those boundaries, here are some tactics that may then be considered.

If an estate holds a TFSA trust, the after-death growth and income will, as discussed above, eventually be taxed to beneficiaries when distributed to them. That distribution is treated as regular income, taxed at marginal tax bracket rates. Alternatively, an executor could close the TFSA and deposit the proceeds to a non-registered estate account that can at least take advantage of the preferred treatment of Canadian dividends and capital gains for those components of any income earned.

The executor could face a dilemma if the TFSA has fallen in value since death, as crystallizing that loss will reduce the eventual exempt contribution available to the survivor, due to that “lesser of” calculation. On the other hand, assuming the TFSA has at least held its value, the exempt contribution will be unaffected, and the move out of the TFSA will protect against a future loss that could reignite this concern.

The additional benefit is if the new account is opened within the first 36 months of a graduated rate estate, low tax bracket rates will be available to use against this income. Still, a sufficient estate distribution would have to be made to allow the spouse/CLP to make an exempt contribution within the rollover period, again being up to December 31 of the year after the year of death.

As noted above, the executor’s first duty is to the estate, and in turn its beneficiaries. Of course, the executor and spouse/CLP are often one and the same. Whatever the makeup of the estate, any tax-driven actions should first be discussed with legal counsel.