US Citizens and TFSA

A tax-free savings account (TFSA) is a registered savings instrument which allows for the earning of tax-free investment income in Canada. However, it is important to note that for US tax purposes, the income earned in a TFSA is considered taxable. This will have an impact on US Citizens who are residents of Canada and therefore are required to file US returns.

Not only will the US Citizen be required to report the investment income on their US return, they will also have to deal with additional US compliance requirements. For every year in which the plan exists a Form 3520-A Annual Information Return of Foreign Trust with a US Owner must be filed. A Form 3520 Annual Return to Report Transactions with a Foreign Trust and Receipt of Certain Foreign Gifts must also be filed for any year in which there is a contribution or a withdrawal. In addition, if your TFSA results in the balance of your non-US financial accounts to exceed $10,000 at any time during the year, Form TD F90-22.1 Report of Foreign Banks and Financial Accounts must also be filed. Penalties for late filing the required forms can be substantial.

In these situations, the Canadian tax savings may be out-weighed by the cost of the additional reporting requirements. If you are a US Citizen living in Canada, contact your local KHGroup office for more information.