Melissa La Venia
Senior Manager | B.A., J.D. | Tax

TFSAs have been a favoured investment option for Canadians since they were introduced in 2009. However, they are not a golden opportunity for everyone, particularly U.S. citizens residing in Canada.

Americans are one of the only populations taxed under a system based on citizenship, and not tax residency. Accordingly, their investment decisions must always take into consideration potential U.S. tax impacts. The choice of investment accounts is particularly critical for Americans living in Canada.

Tax-free Savings Accounts (TFSAs) were introduced in the 2008 Canadian federal budget and have been gaining in popularity ever since. With a TFSA, an individual can invest funds with future returns being earned tax-free. Unlike an RRSP, a TFSA is not a retirement savings plan and individuals of all ages can use it.

The U.S. “TFSA”

TFSAs resemble the U.S. tax-free retirement investment vehicle known as a Roth IRA. Nevertheless, the TFSA does not benefit from the same tax treatment in the U.S. as the Roth IRA.

Under the Internal Revenue Code, Section 408A, a Roth IRA must be a retirement savings plan to qualify for tax-free treatment, which is not the case for a TFSA. U.S. tax legislation therefore does not recognize a TFSA as a tax-free account.

TFSAs were introduced after the last update of the Canada-U.S. Tax Treaty and do not benefit from the new provisions applicable to RRSPs. In other words, income earned in a TFSA held by a U.S. citizen residing in Canada will be taxed in the United States.

Note that the Treaty allows the deferral of U.S. income tax with respect to income accrued in RRSPs until such time as a distribution is made.

Tax Uncertainty

The Internal Revenue Service has not adopted an official position on the taxation of TFSAs. U.S. tax specialists therefore are attempting to navigate the grey area by referring to the IRS policy regarding an RRSP, which is considered a foreign trust that is protected under the Tax Treaty.

This protection does not apply to TFSAs and experts may instead refer to the historical RRSP tax treatment only as a guide.

U.S. tax specialists therefore are advising U.S. citizens who have a TFSA to file a U.S. foreign trust return. Taxpayers who forget or chose not to file such a return may be liable for an annual penalty of $10,000 USD.

Despite the many benefits of TFSAs in Canada, there may be more problems than benefits for a U.S. citizen owning such an account. Until TFSAs fall within the scope of the Canada-U.S. Tax Treaty, tax specialists generally advise against Americans owning such investment vehicles.


Note: this text was originally published (in French) on www.conseiller.ca.

16 Sep 2016  |  Written by :

Mrs. La Venia is a Manager at RCGT. She is your expert in US and International Taxation for the...

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