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IRS Tax Treatment of TFSA

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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.

In 2020, the 3520 and 3520A reporting requirement was waived for the owners of the RESPs and RDSPs that are also considered foreign trusts.

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. 

Getting inheritance from Canada? Learn about Canada Estate Inheritance Death Tax

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.

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Annie Phillips
Annie Phillips
12:35 10 Oct 21
Turn around time was amazing on the project I needed done. When you don’t understand all the different forms... communication is key and you will get that here. They are there to explain what and why you need more
Meru Kapadia
Meru Kapadia
23:33 01 Oct 21
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Kevan Shah
Kevan Shah
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Maunil Shah
Maunil Shah
16:19 01 Oct 21
AKIF CPA is the best place for your tax needs! Saim has been easily available for my all my questions and concerns. ... Couldn’t ask for a better firm that provides excellent service and a familiarity with their clients. I always recommend family and friends to AKIF CPA!!read more
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Shah Hussain
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Sumit Dalwadi
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Ammoria Daniels
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Joe Paneitz
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What an absolute pleasure to work with this CPA firm. My business is already seeing such a positive impact and growth.... I cannot believe I didn't connect with them sooner. This firm is helping in so many ways! 5 stars is an understatement! Thank you so much for your help AKIF CPAread more
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Helptest ARCpoint Labs
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Luz Tipaz
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Maria perez
Maria perez
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Afnaan Amin
22:14 02 Jun 21
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Ryan Paton
10:56 08 May 21
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Tuan Vo
01:59 20 Apr 21
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