FHSAs and tax rules upon death

Last updated on: March 6, 2023

What happens to an FHSA when you die?

It depends on whether you’ve named a beneficiary, a successor holder or how it flows through your estate.

Can I name a successor holder for my FHSA?

Yes. Like the TFSA, you can name a spouse or common-law partner as successor holder allowing them to become the account holder. However, the account retains its tax-exempt status only if they’re eligible to open an FHSA.

Provinces will need to update their laws to recognize a successor holder named outside your will for provincial matters like estate distribution or probate. At this time, we’re waiting for provincial governments to determine their approach. Until then, you may need to name a successor holder in your will.

Does my spouse need FHSA contribution room to inherit my FHSA?

No. Inheriting an FHSA from a deceased spouse doesn’t affect the surviving successor holder’s FHSA contribution room. However, the account retains its tax-exempt status only if they’re eligible to open an FHSA. 

What if my spouse inherits the FHSA and they aren’t eligible to open an FHSA or doesn’t want to retain the FHSA?

Your spouse:

  • may choose to transfer the inherited amount to their RRSP or RRIF on a tax-deferred basis. They must transfer the amount by the end of the year after the year of death. For example, if your spouse dies in 2023, then you must transfer the amount by the end of 2024. They then pay tax when they later withdraw from the RRSP or RRIF; or
  • can withdraw the funds and pay tax at their marginal tax rate.

Does my spouse need RRSP contribution room to transfer the inherited FHSA to their RRSP/RRIF?

No, the transfer doesn’t affect their RRSP contribution room.

Can I name a beneficiary for my FHSA?

Yes. Like a TFSA and RRSP, you can name a beneficiary for your FHSA. If the beneficiary isn’t your spouse or common-law partner, your estate must close the account, withdraw the balance, and pay it to the beneficiary.

 Provinces will need to update their laws to recognize a beneficiary named outside your will for provincial matters like estate distribution or probate. At this time, we’re waiting for provincial governments to determine their approach. Until then, you may need to name a beneficiary in your will.

What if I name my estate as a beneficiary but my spouse inherits the FHSA through my estate?

If you name your estate as the beneficiary of your FHSA, you may still benefit from the tax-deferred rollover. To achieve this, your spouse or common-law partner and legal representative of your estate may jointly elect to transfer the FHSA to:

  • an FHSA in your spouse or common-law partner’s name on a tax-deferred rollover basis, subject to their eligibility to open an FHSA; or
  • their RRSP or RRIF on a tax-deferred rollover basis.

Your spouse and legal representative can also elect to transfer the proceeds to your spouse as taxable cash. Your spouse includes the value of the FHSA in their income and pays the tax rather than your estate. Alternatively, your estate’s legal representative can choose to retain the FHSA proceeds and have the estate pay the tax. The after-tax proceeds form part of the estate and pass to your heirs.

Who pays the tax on an inherited FHSA?

Unlike an RRSP, you don’t include the value of the FHSA in your final tax return. The tax liability depends on who inherits the FHSA.

  • Spouse as recipient. Your spouse can inherit the FHSA on a rollover basis and transfer to an FHSA, RRSP or RRIF. They may have to pay tax or transfer to their RRSP/RRIF if they aren’t eligible to hold an FHSA.
  • Non-spouse recipient. A non-spouse recipient includes the fair market value of the FHSA in their income in the year received. They pay tax at their marginal tax rate. Withholding tax applies at the same rate that applies to lump-sum payments from an RRSP/RRIF.
  • Estate as recipient. If your estate is the recipient, the estate includes the fair market value in its income. The estate pays the tax at its marginal tax rate. Withholding tax applies at the same rate that applies to lump-sum payments from an RRSP/RRIF.

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