When setting up a Tax-Free Savings Account (TFSA) or Registered Retirement Income Fund (RIF), one important decision is choosing between a successor holder and a beneficiary. While both allow assets to be passed on, there are key differences in how they work, especially for spouses and common-law partners.
What is a Successor Holder?
A successor holder is only available for spouses or common-law partners. If you name your spouse as a successor holder on your TFSA or RIF, they take ownership of the account upon your passing, keeping all holdings intact. The account remains tax-sheltered, and no formal transfer is required—just a simple update of the account holder’s name.
For TFSAs, this means:
- Your spouse inherits both the value and the contribution room of your account.
- Future growth remains tax-free, avoiding potential tax consequences.
- If contributions were made before passing, the spouse benefits from that extra room.
For RIFs, a successor holder can continue receiving payments as originally structured, rather than having the account liquidated or taxed immediately upon death.
What is a Beneficiary?
Unlike a successor holder, a beneficiary simply receives the account’s value as a lump sum, rather than inheriting the account itself. This distinction matters because:
- The beneficiary does not inherit extra TFSA contribution room.
- The funds can be transferred but may lose their tax-sheltered status, depending on how they are handled.
- In the case of a RIF, the amount may be subject to taxation before being transferred to a beneficiary.
Contingent Beneficiaries
You can also name contingent beneficiaries, secondary recipients in case your primary beneficiary or successor holder predeceases you. This ensures your TFSA or RIF aligns with your wishes, regardless of unforeseen circumstances.
Making the Right Choice
For spouses in first marriages, naming a successor holder is often the most beneficial option, maximizing tax advantages. However, for blended families, estate planning may require balancing financial benefits and family dynamics.
Since updating registered account beneficiaries is simple and cost-free, it’s worth reviewing your designations regularly to ensure they align with your estate plan.