TFSA Mistakes to Avoid and the Most Tax-Efficient Way to Transfer It to the Next Generation

The Tax-Free Savings Account (TFSA) is one of the strongest financial tools in Canada—yet one of the most misused. Many Canadians unknowingly lose out on tax-free growth or make costly errors that trigger CRA penalties. Even fewer understand how the TFSA passes to the next generation.

This guide explains practical TFSA tips, the most common mistakes, and the cleanest way to transfer a TFSA upon death using verified CRA and Income Tax Act (ITA) rules.

What Is a TFSA?

A TFSA allows Canadians aged 18+ with a valid SIN to save and invest with tax-free growth. Interest, dividends, and capital gains are all tax-free inside a TFSA.
Source: CRA TFSA Guide (RC4466)
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466.html

How contribution room works:

• Annual limit

• Unused room from past years

• Withdrawals from the previous year

Withdrawals do not create immediate room. Contribution room only resets January 1 of the next year.
Source: CRA Withdrawals
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/withdraw.html

If you transfer your TFSA to another bank, always do a direct transfer to avoid accidental over-contribution.
Source: CRA Transfers
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/transfer.html

Practical TFSA Tips You Can Use Today

1. Track your own TFSA contribution room

Financial institutions report your activity to CRA, but CRA lists can lag. Keep your own simple record to avoid penalties.

2. Use your TFSA for long-term investing, not just saving

High-growth investments benefit most from tax-free compounding. However, before making any financial investment in your TFSA, seek advice from a licensed financial advisor.

3. Prioritise TFSA withdrawals over RRSP withdrawals

TFSA withdrawals are tax-free. RRSP withdrawals are taxable and permanently reduce retirement savings.

4. Consolidate TFSA accounts

Fewer accounts reduce tracking mistakes and simplify transfers.

Common TFSA Mistakes and How to Avoid Them

Mistake 1: Re-contributing too soon after withdrawing

Example:

• No available room

• Withdraw $5,000 today

• Re-contribute $5,000 next week
  → You have over-contributed.

Fix: Only re-contribute withdrawal amounts next calendar year, unless you already had unused room.

Mistake 2: Moving your TFSA between banks by withdrawing it

A withdrawal + re-contribution counts as new contributions.

Fix: Always ask the new institution to perform a direct TFSA transfer.

Mistake 3: Not naming a successor holder or beneficiary

This error causes:

• Taxable growth after death

• Probate delays

• Loss of tax-free status for the surviving spouse

More on this in the next section.

How to Transfer a TFSA to the Next Generation

The tax outcome depends entirely on the designation written in your TFSA contract. There are two options, and the difference is massive.

Option 1: Name a Successor Holder (Best for Spouses)

A successor holder is usually your spouse or common-law partner. They become the new TFSA holder immediatelyupon your death.

Why this is the most tax-efficient option

• Full TFSA stays tax-free

• No contribution room needed

• No tax on income earned after death

• No probate

• No delays or paperwork beyond notifying the institution

CRA Source: Successor Holder
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/death-of-holder/successor-holder.html

Example

A TFSA worth $120,000 at death transfers directly to the spouse, who continues it as their own TFSA. Growth remains sheltered.

Option 2: Name a Designated Beneficiary (For Children or Anyone Else)

A beneficiary receives the TFSA value, not the account.

Key rules

• Amount up to date-of-death value = tax-free

• Growth after death = taxable

• Spouses can make an exempt contribution (Form RC240)

• Children or others must have enough TFSA room to re-invest

CRA Source: Beneficiary Rules
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/death-of-holder/beneficiary.html

Example

Parent dies with TFSA worth $80,000.
Child receives $80,000 tax-free.
If the child deposits it into their TFSA, they must have contribution room. Otherwise, CRA charges the excess contribution tax (1% per month).

What the Law Says (Income Tax Act References)

ITA Section 146.2 governs TFSA rules:

• Eligibility

• Tax-free growth

• Excess contribution tax

• Holder rules

https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-146.2.html

Checklist for Tax-Efficient TFSA Transfer

During your lifetime

• Name your spouse as successor holder

• If naming children, use beneficiary

• Align designations with your will

• Tell your executor where the account is

After death

• Executor contacts TFSA issuer immediately

• Confirm successor holder or beneficiary

• Transfer or close account quickly to avoid taxable growth

• If spouse is beneficiary (not successor), file RC240

• If children inherit TFSA money, confirm their room before depositing

FAQs

1. What happens to a TFSA when someone dies?

If a spouse is named successor holder, the TFSA continues tax-free. If a beneficiary is named, the beneficiary receives the money but must follow TFSA rules.

2. Can children inherit a TFSA tax-free?

Yes, the amount up to the date-of-death value is tax-free. But they cannot take over the TFSA account itself.

3. Is TFSA inheritance taxable?

The TFSA value at date of death is tax-free. Growth after death may be taxable unless there is a successor holder.

4. How do I avoid TFSA over-contribution penalties?

Track your own room and re-contribute withdrawals only the next calendar year.

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