If you keep your TFSA after you move from Canada to the US, and you don’t report your TFSA income, you may have to pay a penalty to the IRS.
But that’s not all. It gets worse.
If you have Canadian exchange-traded funds (ETF) or mutual funds in your TFSA, and you move to the US, you may have to file IRS Form 8621. This is a complex form, so you may need a cross-border tax specialist to do it for you. The cost to prepare the 8621 form begins at $600, and can go much higher.
And you have to file a separate Form 8621 for each Canadian ETF you have. This applies to most US tax residents, whether you become a US citizen, permanent resident (green card holder,) or meet the requirements of US tax residency via the Substantial Presence Test.
How the US Treats Your TFSA
TFSA rules for US citizens can be quite complex. The IRS does not provide tax-free status for your Canadian TFSAs. They may treat your tax-free savings account as a taxable foreign trust, or Passive Foreign Investment Company (PFIC).
Here are just a few of the disadvantages to moving to the US with a TFSA:
- Any income or capital gains become fully taxable in the United States
- You generally can’t claim a foreign tax credit on your US tax return
- You may fall victim to double taxation if you can’t claim a foreign tax credit and you’re required to pay taxes to both the US and Canada
- If you have Canadian exchange-traded funds (ETF) or mutual funds in your TFSA, and you move to the US, you may have to file IRS Form 8621 at an average cost of $320 per ETF.
Why ETFs and Mutual Funds In a TFSA Are the Real Trap
You could be required to file IRS Form 8621 if you hold Canadian ETFs and/or mutual funds in your TFSA when you move to the US.
These are complex forms, and you’ll probably need a tax consultant who specializes in cross-border tax services in the US and Canada to file them for you.
Most tax software programs don’t offer the foreign filing forms you need to meet the TFSA rules in the US.
Why You Want to Avoid TFSA Form 8621 Requirements
8621 forms can be very expensive to file, and you may have to file a separate Form 8621 for every foreign ETF and/or mutual fund you hold in your TFSA.
If you have ten foreign funds in your TFSA, you could be looking at a bill of about $1,000 per fund, just to prepare the form for filing.
The Foreign Trust Question: Forms 3520 and 3520-A
If the IRS classifies your TFSA holdings as a foreign trust, you may also have to file an annual Form 3520 and/or 3520-A to stay in compliance with their TFSA rules for US citizens. This tax form is considered a standalone information return, which you have to file in addition to your annual tax return.
If you’re required to file Form 3520, and don’t file it on time, then you might have to file Form 3520-A to catch up on your US taxes. If you are required to file a 3520 form and don’t, the penalties are severe. You could get hit with a penalty of $10,000 USD, or 5% of the gross value of your foreign account, whichever is greater.
What to Do with Your TFSA When You Move to the US
If you’re planning to move from Canada to the US, your cross-border tax accountant may suggest you consider closing your TFSA. You lose its tax-free status when you become a US tax resident, and the costs associated with keeping it in the US may outweigh any return you could potentially see in the account. The Canada Revenue Agency (CRA) could also assess a 1% penalty if you contribute to your TFSA once you’re no longer a Canadian resident. In many cases, the risk is just not worth it.
How RRSPs are Different than Tax-Free Savings Accounts
RRSPs (Registered Retirement Savings Plans) continue to be tax-deferred if you move to the US. You may not have to pay US taxes on your RRSP until you make a withdrawal, and unlike traditional IRA and 401(k) accounts in the United States, there’s no early withdrawal penalty on an RRSP, regardless of your age.
The US-Canada tax treaty allows for continued deferral in your RRSP account, and your RRSP is usually not subject to deemed disposition of your assets as part of Canada departure tax on your accounts. However, the CRA may tax you on any withdrawals you make.
TFSA for US Residents: Frequently Asked Questions
Is a TFSA Taxable in the US?
A TFSA is taxable in the US. The IRS does not recognize the account’s tax-free status the way the CRA does in Canada. You may have to report foreign investments in your TFSA, and the amount you pay between taxes and the expense to prepare expensive foreign filing forms like Form 3520, 3520-A and Form 8621 may outweigh any potential return you could expect from your investments.
Do I Have to Report My TFSA to the IRS?
You have to report your TFSA to the IRS. The United States and Canada share information, and if you don’t report your TFSA, you could get hit with costly penalties. In some cases, failure to properly report foreign accounts can trigger IRS penalties of $10,000 or more.
Should I Close My TFSA Before Moving to the US?
Closing your TFSA before moving to the US may be a good idea. It depends on your unique tax situation, but if you lose the tax-deferral benefit of your TFSA and have to file costly forms to disclose the foreign assets you hold in it, it may not be worth keeping. Your cross-border tax consultant can advise you on whether you should close your TFSA.
What Is the Difference Between a TFSA and a Roth IRA?
The differences between a TFSA that originates in Canada and a Roth IRA are significant. Roth IRAs are intended for retirement in the US, but Canadian TFSAs can be used to help you save for any goal, not just retirement. Roth IRAs have age-related restrictions, including an early withdrawal penalty if you remove funds from your Roth before age 59 1/2. Roth IRAs also have income limits that TFSAs don’t.
Get Help with Your TFSA from a Cross-Border Tax Accountant
Planning to move from Canada to the US? If you have questions about TFSAs for US residents, request a FREE consultation with cross-border accountant and Sr. Tax Manager Kelly Sheng.
Kelly is based in Toronto, Canada, and specializes in complex cross-border tax services. In addition to being a CPA, Kelly is also a Canadian Chartered Professional Accountant with over 20 years of experience. She assists clients every day with foreign filing requirements, including participating in the US Streamlined Filing Compliance Procedures, if needed.