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U.S. Citizens With A TFSA

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.