TFSA US Tax Trap
The Tax-Free Savings Account is tax-exempt in Canada but receives no treaty protection in the US. The IRS classifies a TFSA as a foreign grantor trust, requiring Forms 3520 and 3520-A annually. Failure to file can result in penalties starting at $10,000 per form per year.
Key Points
- The TFSA has no US tax treaty exemption unlike the RRSP.
- The IRS treats TFSAs as foreign grantor trusts under IRC Sections 671-679.
- Income earned inside the TFSA is taxable on your US return each year.
- Forms 3520 and 3520-A are required annually with penalties of $10,000+ for non-filing.
- FBAR and FATCA reporting also apply to TFSA balances.
Action Items
- 1.Report all TFSA income on your US Form 1040 each year.
- 2.File Form 3520 with your tax return and Form 3520-A by March 15.
- 3.Include TFSA accounts on your FBAR (FinCEN 114) if aggregate foreign accounts exceed $10,000.
- 4.Consider liquidating the TFSA if you are a long-term US resident to avoid ongoing compliance costs.
Frequently Asked Questions
Can I keep contributing to my TFSA while living in the US?
Technically yes if you maintain Canadian residency for TFSA purposes, but every dollar of growth is taxable in the US and triggers trust reporting. Most advisors recommend stopping contributions.
What are the penalties for not reporting a TFSA?
The minimum penalty is $10,000 per form per year. Both Form 3520 and 3520-A carry separate penalties, so the exposure is at least $20,000 annually.
Does the Streamlined Filing program cover missed TFSA reporting?
Yes. If your failure was non-willful, you can use the Streamlined Foreign Offshore Procedures to file delinquent 3520/3520-A forms without penalties.
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