A TFSA is not considered tax-free by the IRS in the U.S., and income earned in a TFSA is reportable and taxable on a current year basis in the U.S. on form 1040.
In Canada, Canadian are encouraged to open TFSA accounts and save for retirement without worrying about tax. All of the interest, gains, dividends, and investments made throughout as well as withdrawals from these savings sources are tax-free. But, in the US, the TFSA account does not enjoy the same tax status as it does in Canada. For U.S. taxpayers such as Canadian living in the U.S. or U.S. citizens and green card holders resident in Canada, any gains, interest, dividends is reportable and taxable on the form 1040.
TFSA FBAR and Form 8938 Reporting
FBAR and Form 8938 are also applicable to TFSA accounts. If you fail to disclose the information of your
accounts, then it can result in heavy penalties. If a non-US account exceeds US$10,000 at any time during
the year then both FBAR and form 8938 can be applicable. Learn about more U.S tax implications on the type of Canadian investment, assets, or accounts if you have moved to the U.S.
TFSA U.S. Trust 3520 and 3520-A Reporting
Did you know that there are chances the IRS might consider your TFSA as a foreign trust? If it does, then
the US taxpayer needs to fill out Form 3520A Annual Information Return of Foreign Trust With a U.S.
Owner and Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain
Foreign Gifts to report withdrawals and contributions.
TFSA U.S. PFIC Reporting
The majority of banks in Canada will offer investment choices through TFSA that contain Canadian Mutual Funds and Canadian Exchange Traded Funds. Investments such as Canadian Mutual Funds and Canadian Exchange Traded Funds (ETF) are considered a passive foreign investment company (PFIC) for US tax purposes.
A PFIC is a non-U.S. corporation that has a passive income of 75% or more of its gross income, and 50% or more of the corporation’s assets produce passive income, which generally includes rents, annuities, interest, dividends, royalties, and capital gains.
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If you are a U.S. taxpayer such as a Canadian living in the U.S. or U.S. citizen and green card holder’s resident in Canada holding a PFIC, it is important to file IRS Form 8621. For a taxpayer who has invested in a PFIC, the qualified election fund (QEF), an election, can help avoid high taxes and interest charges. The income generated through a qualified election fund (QEF) is taxed just like ordinary income while capital gains are treated as they would be normally for US tax purposes. In order to qualify for the QEF election, a fund must provide annual information statements (AIS) to its investors.
In a nutshell, the TFSA is less attractive for the US taxpayers as they don’t get to enjoy any special IRS tax treatment.
Have questions about IRS tax treatment of TFSA? Contact us before the IRS contacts you!
While a general overview of this subject matter is offered on the page, it’s important to seek out advice from an expert. Akif CPA will not be held responsible for any issues that arise because you used the information provided on our website as being completely accurate and reliable.
