The proceeds of a tax-free savings account (the deposits and all returns earned prior to death), will form part of “property” as defined in the Estate Duty Act.

This means that following the death of the holder of a TFSA, Estate Duty will be levied on this amount. 

Personal Finance explains very nicely how estate duty affects TFSA's in a blog post entitled Tax-free Savings accounts: What you should know 

Scroll down in the article to point 7. titled "One tax you will pay".