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Can you make a child not even two years old the beneficiary of a TFSA?

A 70-something woman asks this question on behalf of a granddaughter. Here’s an answer from Carol Bezaire, vice-president of tax, estate and strategic philanthropy at Mackenzie Investments. Ms. Bezaire said a minor child or grandchild needs an adult to act on his or her behalf for matter such as this. This means the granddaughter should not be named directly as beneficiary.

A solution: Designate the child’s mother (daughter to the woman asking this question) as beneficiary for the TFSA, but as trustee for the granddaughter.

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“If you do this, your daughter will receive the TFSA proceeds on behalf of your minor granddaughter,” Ms. Bezaire wrote in an e-mail. “You can name your daughter in your will to be trustee as well for any inheritance your granddaughter receives with instruction as to how your daughter then pays out to your granddaughter (at age 18, 21, 25 or whatever you feel you want to do).”

Once the granddaughter reaches the age of majority, the grandmother can change the beneficiary designation on her TFSA to her granddaughter if she wishes, Ms. Bezaire added.

The grandmother also wanted to know if the proceeds of her TFSA could be transferred to the granddaughter as a TFSA, or if the account had to be cashed out first.

Ms. Bezaire said the TFSA in this case must be collapsed and the proceeds paid out. TFSAs can only be passed to a beneficiary who is a spouse or common-law partner. The spouse or partner would have to be designated as a “successor holder” for that kind of a transfer.

On taxes, the grandmother wondered who was responsible for taxes on the TFSA holdings between the date of death and the handover to the granddaughter.

“Any investment income or growth in the account between the date of your passing and the date of distribution to your granddaughter will be taxable to your granddaughter,” Ms. Bezaire said.

One final note on taxes: With the TFSA paid out to the granddaughter, the grandmother’s final tax return would not have to include the TFSA amount.

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