# US Citizens and TFSAs



## brad (May 22, 2009)

Just got back from my accountant, who explained to me that the IRS in the United States has a new law that considers the TFSA a trust, and the interest earned is taxable. This isn't the case for RRSPs, only TFSAs. I'm a dual US-Canadian citizen living in Canada; I didn't have to pay any tax on my TFSA income this year but we did have to fill out and submit a couple of long and complicated forms to the IRS (failure to submit these forms results in a fine of up to $10,000 each). 

My accountant advised me to close my TFSA to avoid having to pay taxes in future years and also to avoid the expense associated with filling out and submitting these forms. I can shift my TFSA over to my RRSP, since I have plenty of contribution room this year. But before I do all this, I wanted to check to see if anyone else has run into this problem and whether they've received different advice.


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## HaroldCrump (Jun 10, 2009)

Run, not walk, to your nearest US Consulate, fill out a few forms, and relinquish your US citizenship.
It's not worth the trouble :rolleyes2:


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## brad (May 22, 2009)

Haha, I know a lot of people are doing that, but it won't work for me for various work- and finance-related reasons.


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## Four Pillars (Apr 5, 2009)

HaroldCrump said:


> Run, not walk, to your nearest US
> 
> Consulate, fill out a few forms, and relinquish your US citizenship.
> It's not worth the trouble :rolleyes2:


Unfortunately, even if he wanted to do that, it's not that easy.


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## financialnoob (Feb 26, 2011)

I haven't heard of any new law regarding this, but my understanding was that the interest was always taxable on them since they started.

http://blog.taxresource.ca/u-s-citizens-with-a-tfsa/

The treaty with the US exempts retirement plans, but since the TFSA is not technically considered a retirement plan, it would be treated like any other savings account for the IRS, despite the "tax free" in the name.

I'm wondering if this income falls under the Exclusion of foreign earned income area, so unless you're making $90K+ or had significant gains in the TFSA, it should still be exempt? But it's something you should check with your accountant.


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## brad (May 22, 2009)

financialnoob said:


> I'm wondering if this income falls under the Exclusion of foreign earned income area, so unless you're making $90K+ or had significant gains in the TFSA, it should still be exempt? But it's something you should check with your accountant.


Thanks -- and yes, this is in line with what my accountant said. My income is considerably north of $90K but my TFSA gains have been exempt so far...as they grow, eventually they will reach a stage when they are not and I'll start having to pay taxes on them. I think the new thing this year is not so much the law but the complicated new forms to fill out.


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## financialnoob (Feb 26, 2011)

If you don't mind me asking, which new forms were they? Are you referring to the Treasury Department Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, which carries a $10K fine, but is there another one? 

Karen had mentioned that in another thread and that was a great help. It's been in the media a lot lately so I'm not sure if it is a newer form or just a point of emphasis for the US lately. Margaret Wente of the G&M also got hit by that.

And I don't know if I would close out the TFSA entirely. It's true that it isn't exactly tax-free in your case, but it could still be useful as a cash account which generates more interest than your regular savings accounts probably do. I also wonder whether the TFSA would still be taxable if you passed away and a potential successor holder was Canadian. I have no clue how that might work but might be worth asking about if it is applicable to your situation.


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## brad (May 22, 2009)

financialnoob said:


> If you don't mind me asking, which new forms were they? Are you referring to the Treasury Department Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, which carries a $10K fine, but is there another one?


I've been filling that one out every year (it's a real incentive to consolidate one's accounts, because the fewer accounts you have, the less time it takes to complete the form), but the new form for me this year is Form 3520 (http://www.irs.gov/pub/irs-pdf/f3520.pdf), which applies to the TFSA and also carries a $10K fine if you don't submit it.


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## financialnoob (Feb 26, 2011)

Thanks Brad, that is a new one. Just finished reading about the clarification on the TFSAs. Hopefully we don't get dinged for being late on something it took them 3 years to decide on. :hopelessness:

Just wondering if there's even a point to an American having a TFSA if it just leads to all this paperwork and no true tax-free growth. You are allowed to exclude an amount of income every year (around the $90K mark) so it may make sense if your income isn't in the 6-digits.


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