US Citizens Living in CANADA! Tax Implications: Tax Free Savings Account – TFSA & Registered Education Savings Plan

US Citizens Living in CANADA! Tax Implications: Tax Free Savings Account – TFSA & Registered Education Savings Plan

Having a Tax Free Savings Account or for short TFSA has a great tax advantages for Canadians because similar to a ROTH IRA in the US, the earnings in a TFSA are tax free and so is the principal amount because the amount that you contribute into a TFSA are not deductible on your Canadian Tax Return.

As stated by the Canadian Revenue Agency “It is a way for individuals who are 18 and older and who have a valid social insurance number to set money aside tax-free throughout their lifetime”

Although earnings in TFSA are tax free in Canada, the internal revenue code of the US recognizes income in TFSA as Taxable income in the United States to a person holding a Tax Free Savings Account.

Furthermore, in a similar fashion with a RESP is typically created as a tax deferred vehicle by Canadian parents for their children to assist their child with their qualified education expenses when they are going to college as the grants and earnings received are non-taxable with the Canadian Revenue Agency until the funds are withdrawn.

But similar to TFSA, RESP’s are not recognized as a tax deferred or savings vehicle for US Tax purposes if the Subscriber/grantor and/or the beneficiary is a US Person for tax purposes. Per the Internal Revenue Code, the US recognizes income and grants received under the RESP as taxable income when received to the US Grantors of the Education Savings Plan.

The complications continue for both RESP and TFSA that both of these plans are considered as a foreign Grantor Trust for US Tax purposes. So there is an element if a IRS Form 3520/3520-a to be considered when their ownership, earnings, and/or distributions from RESP and TFSA. IRS Form 3520-A is due 2 and half months after the year ends, so for most, this will be generally be March 15th and IRS Form 3520 must be filed with the Individual person’s tax return.
The minimum penalty for not filing these forms timely is $10,000. It is important to be compliance with the US Tax laws as Foreign Account Tax Compliance Act has commenced in March 2010. Canada and U.S. Signed an intergovernmental agreement (IGA) on a February 5th, 2014. With the IGA, IRS will be receiving information on accounts held by U.S. Persons from Canadian Revenue Agency as the CRA will be receiving this sensitive information from Canadian Financial institutions. Due to this agreement between the US and Canada, the IRS has received roughly 155,000 US Citizens bank records held in Canada. There is another wave of accounts of US persons in Canada to be reported in September 2016.

We assist numerous clients by assisting them to enter into OVDP – Offshore Voluntary Disclosure Program, Streamlined Domestic Offshore Procedure, Delinquent FBAR Submission Procedures, and Delinquent International information Return Submission Procedures.

Modi CPA is a licensed firm in the state of Texas in The Colony, TX and service clients throughout the United States, Canada, India, Russia, UK, and DFW Metroplex area (Dallas, Addison, Lewisville, Plano, Garland, Forth Worth, Arlington, Richardson, McKinney).We are a qualified firm to discuss Domestic and International tax services to ensure your compliance with the United States’ International tax laws. Do not hesitate to contact our office should you have further questions. Our Phone number is (214)618-0468 and email is