U.S. Citizens With A TFSA

by Tax Guy - Burlington Accountant on December 22, 2009 Print This Post Print This Post

The United States is arguably one of Canada’s most important partners and with the close proximity it is probably no surprise that there are a significant number of U.S. citizens living and working in Canada. If you are a U.S. citizen living in Canada and you opened a TFSA this year, you may be a little surprised to get a 1099 tax form.

The U.S. Tax Situation

The United States is one of the few countries in the world that levies income tax on both citizens and residents. Other countries, including Canada, charge income tax only to residents of the country. What this means is that, U.S. citizens in Canada end up having to file a Canadian and a U.S. income tax return each year and report worldwide income in both countries.

The U.S. provides a credit to its non-resident citizens for the taxes paid to a foreign jurisdiction, with the result being that the person ends up paying the tax rate in the higher of the two countries.

What’s this got to do with the TFSA?

It is about tax treatment of the TFSA in the U.S. Under the Canada-U.S. Income Tax Treaty, only plans established to administer or “provide pension, retirement or employee benefits” are exempt from tax. This rule effectively eliminates the tax on RRSPs and RRIFs in Canada and IRAs in the U.S. but the TFSA is not considered a retirement plan under the treaty!

How is The TFSA Taxed In The U.S.?

The TFSA is treated like any other type of non-retirement (open) account. All income earned in a TFSA held by a U.S. citizen resident in Canada is fully taxable and is to be reported on the 1040 tax return.

Is The TFSA Worth It For U.S. Citizens In Canada?

If you have sufficient foreign tax credits in the U.S., holding investments in the Canadian TFSA may still be beneficial.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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{ 6 comments }

Satyricos January 19, 2010 at 4:37 pm

Thanks for this information. I wonder if the reason that TFSA is not covered under the tax treaty between the US and Canada is simply because the TFSA is new–it is virtually identical to the Roth IRA. This means, that for all intents and purposes, an American living in the US cannot benefit neither from a Roth IRA nor from a TFSA.

I suppose that what would happen is that any tax paid on a TFSA in the US could then be deducted from the Canadian taxes, while any tax paid in Canada would be deducted from the US tax. After five or six such iterations, I suppose that I would still owe no tax in the US since Canadian taxes are higher for someone in my tax bracket (below 50,000). What do you think? Why bother informing the IRS of my TFSA in the first place if that is the case?

Tax Guy January 20, 2010 at 11:13 am

The Canada-U.S. Tax Treaty covers pensions and similar retirement plans. based on a read of the current definitions an RRSP or RRIF qualifies as a pension as does an IRA. But, the Roth version, generally, does not (except in limited circumstances).

I’m not convinced the treaty will ever cover TFSA and Roth accounts directly although any thing is possible.

My opinion is that if you have US filing obligations, let a tax professional deal with them. I suppose you could prepare the returns a couple of times to eliminate the tax effect.

As for not disclosing the TFSA to the IRS? If you are a US citizen and fail to disclose an interest in a foreign trust (the self-directed TFSA is a trust), you could run into some pretty heavy handed penalties.

Dale A. Walters June 27, 2012 at 12:08 pm

Dean,

You did not mention if you thought Form 3520 is required if I have a TFSA in the US.

Please advise.

Tax Guy June 27, 2012 at 12:13 pm

Hi Dale,

TFSA’s that can hold stocks, bonds and mutual funds would require the 3520 because the account is structured as a trust. Bank account TFSAs and TFSA GICs would not require the 3520 because they are not held by a TFSA trust.

Your thoughts?

Fred February 26, 2013 at 5:32 pm

Hi
I order to keep the TFSA , and to benefit from keeping it , how do I know and find out how much foriegn tax credit do I have in united States?
Thanks

Dale Walters March 1, 2013 at 4:29 pm

As a Canadian in the US, you receive no benefit for holding money in a TFSA. My recommendation is to liquidate the TFSA, bring the money to the US and invest the money in a Roth IRA if you are eligible, if not, then add it to your savings or portfolio.

There are no foregin tax credits because you are not paying tax in Canada and there is therefore no tax to offset with the US tax.

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