I know that the IRS does not recognize the tax-sheltered status of the TFSA, but want to make sure my understanding is correct.
(First off, am I correct that the IRS will not tax mere [i]appreciation[/i] within your TFSA, if you don't realize those gains, right? e.g. let's say I've contributed $40,000 to my TFSA while living in Canada and it has appreciated to $50,000...and then I become a US tax resident with a $50,000 in my TFSA on Jan 1st, and I don't buy/sell anything throughout the year, and on Dec 31st it has appreciated to $60,000, the $10,000 appreciation isn't taxable, correct?)
Which brings me to my Q: isn't it a no-brainer for everyone moving to the US to liquidate their TFSA? If the US doesn't recognize the tax-sheltered status of it anyway, and if having a TFSA while a US tax resident will trigger all sorts of weird reporting requirements, why not just get rid of it when you move? After all, if you ever move back to Canada you'll have (using my example #'s above) $50,000 of TFSA contribution room you can recapture then, right? So there's really no downside and you avoid all kind of annoying filing requirements right?
Canadian moving to the US - liquidating TFSA no-brainer?
Moderator: Mark T Serbinski CA CPA
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markitzero
- Posts: 14
- Joined: Sat Dec 22, 2012 11:11 pm
The collapse of a tFSA beforeleaving is a no-brainer: correct.
TFSA is not only a problem because the triggered income inside it is taxable.
There are 3 other issues:
1. A Cdn broker cannot hold a TFSA for a US resident unless they are licensed in your state of residence. Very few brokers are doing this, even for RRSPs. In fact the rules are not even clear if a Cdn broker who is licensed to deal in your RRSP can do so in your TFSA.
2. TFSA's are foreign trusts in the eyes of the IRS, thus they require trust reporting using forms 3520 and/or 3520-A. This is a difficult process requiring cooperation with your trustee, which is not always forthcoming.
3. To you point about accrued income, if the TFSA holds Cdn mutual funds or ETFs (if the broker is allowed to sell you these), they will fall under the PFIC rules, which in most case require you to pay tax on the gains yearly, under amark-to-market process. So they are taxed every year.
4. FATCA rules from IRS are alwys worrisome to Cdn broker/dealers. They simply may not want you as a client anymore, when you are in US.
All these problems plague US citizes living in canada, even when they end up owing no US tax on the income, it is simply even worse if you are living in US.
so, ALWAYS best to collapse the TFSA befoer leaving. You can always put back every penny you take out, if and when you come back to canada.
TFSA is not only a problem because the triggered income inside it is taxable.
There are 3 other issues:
1. A Cdn broker cannot hold a TFSA for a US resident unless they are licensed in your state of residence. Very few brokers are doing this, even for RRSPs. In fact the rules are not even clear if a Cdn broker who is licensed to deal in your RRSP can do so in your TFSA.
2. TFSA's are foreign trusts in the eyes of the IRS, thus they require trust reporting using forms 3520 and/or 3520-A. This is a difficult process requiring cooperation with your trustee, which is not always forthcoming.
3. To you point about accrued income, if the TFSA holds Cdn mutual funds or ETFs (if the broker is allowed to sell you these), they will fall under the PFIC rules, which in most case require you to pay tax on the gains yearly, under amark-to-market process. So they are taxed every year.
4. FATCA rules from IRS are alwys worrisome to Cdn broker/dealers. They simply may not want you as a client anymore, when you are in US.
All these problems plague US citizes living in canada, even when they end up owing no US tax on the income, it is simply even worse if you are living in US.
so, ALWAYS best to collapse the TFSA befoer leaving. You can always put back every penny you take out, if and when you come back to canada.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
The collapse of a tFSA beforeleaving is a no-brainer: correct.
TFSA is not only a problem because the triggered income inside it is taxable.
There are 3 other issues:
1. A Cdn broker cannot hold a TFSA for a US resident unless they are licensed in your state of residence. Very few brokers are doing this, even for RRSPs. In fact the rules are not even clear if a Cdn broker who is licensed to deal in your RRSP can do so in your TFSA.
2. TFSA's are foreign trusts in the eyes of the IRS, thus they require trust reporting using forms 3520 and/or 3520-A. This is a difficult process requiring cooperation with your trustee, which is not always forthcoming.
3. To you point about accrued income, if the TFSA holds Cdn mutual funds or ETFs (if the broker is allowed to sell you these), they will fall under the PFIC rules, which in most case require you to pay tax on the gains yearly, under amark-to-market process. So they are taxed every year.
4. FATCA rules from IRS are alwys worrisome to Cdn broker/dealers. They simply may not want you as a client anymore, when you are in US.
All these problems plague US citizes living in canada, even when they end up owing no US tax on the income, it is simply even worse if you are living in US.
so, ALWAYS best to collapse the TFSA befoer leaving. You can always put back every penny you take out, if and when you come back to canada.
TFSA is not only a problem because the triggered income inside it is taxable.
There are 3 other issues:
1. A Cdn broker cannot hold a TFSA for a US resident unless they are licensed in your state of residence. Very few brokers are doing this, even for RRSPs. In fact the rules are not even clear if a Cdn broker who is licensed to deal in your RRSP can do so in your TFSA.
2. TFSA's are foreign trusts in the eyes of the IRS, thus they require trust reporting using forms 3520 and/or 3520-A. This is a difficult process requiring cooperation with your trustee, which is not always forthcoming.
3. To you point about accrued income, if the TFSA holds Cdn mutual funds or ETFs (if the broker is allowed to sell you these), they will fall under the PFIC rules, which in most case require you to pay tax on the gains yearly, under amark-to-market process. So they are taxed every year.
4. FATCA rules from IRS are alwys worrisome to Cdn broker/dealers. They simply may not want you as a client anymore, when you are in US.
All these problems plague US citizes living in canada, even when they end up owing no US tax on the income, it is simply even worse if you are living in US.
so, ALWAYS best to collapse the TFSA befoer leaving. You can always put back every penny you take out, if and when you come back to canada.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
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markitzero
- Posts: 14
- Joined: Sat Dec 22, 2012 11:11 pm
[quote="nelsona"]
3. To you point about accrued income, if the TFSA holds Cdn mutual funds or ETFs (if the broker is allowed to sell you these), they will fall under the PFIC rules, which in most case require you to pay tax on the gains yearly, under amark-to-market process. So they are taxed every year.
[/quote]
re: #3 in your answer, so you're actually saying that the mere appreciation of TFSA holdings *IS* taxable...but only if they're mutual funds / ETFs? What if it's just shares of common stock? It would make sense that dividends & interest paid on my TFSA holdings would be taxed by the IRS (if they don't recognize the TFSA's tax-sheltered status), but I'm surprised to learn that even unrealized gains within the account are fully taxable(?)
So consider the following 3 scenarios if I had an S&P 500 ETF valued at $50,000 before moving to the US on Jan 1, 2015:
1) I leave it in my TFSA
2) I withdraw that ETF from my TFSA and move it to a regular investment account with my Canadian broker
3) I withdraw the ETF from my TFSA and use the proceeds to purchase an equivalent ETF with a US broker after I move.
If the $50K appreciates to $60K by Dec 31, 2015, then am I correct that in Scenarios 1 & 2, that $10K appreciation will be fully taxable by the IRS (even if unrealized), whereas scenario #3 won't be taxed at all?
***Moreover, scenario #3 may even offer the benefit of $10K of completely tax-free appreciation if I then move back to Canada, since there's no US departure tax, so it'll simply have a $60K cost basis upon return to Canada...I could then re-deposit $50K into my TFSA, and have $10K completely tax-free, yes?
3. To you point about accrued income, if the TFSA holds Cdn mutual funds or ETFs (if the broker is allowed to sell you these), they will fall under the PFIC rules, which in most case require you to pay tax on the gains yearly, under amark-to-market process. So they are taxed every year.
[/quote]
re: #3 in your answer, so you're actually saying that the mere appreciation of TFSA holdings *IS* taxable...but only if they're mutual funds / ETFs? What if it's just shares of common stock? It would make sense that dividends & interest paid on my TFSA holdings would be taxed by the IRS (if they don't recognize the TFSA's tax-sheltered status), but I'm surprised to learn that even unrealized gains within the account are fully taxable(?)
So consider the following 3 scenarios if I had an S&P 500 ETF valued at $50,000 before moving to the US on Jan 1, 2015:
1) I leave it in my TFSA
2) I withdraw that ETF from my TFSA and move it to a regular investment account with my Canadian broker
3) I withdraw the ETF from my TFSA and use the proceeds to purchase an equivalent ETF with a US broker after I move.
If the $50K appreciates to $60K by Dec 31, 2015, then am I correct that in Scenarios 1 & 2, that $10K appreciation will be fully taxable by the IRS (even if unrealized), whereas scenario #3 won't be taxed at all?
***Moreover, scenario #3 may even offer the benefit of $10K of completely tax-free appreciation if I then move back to Canada, since there's no US departure tax, so it'll simply have a $60K cost basis upon return to Canada...I could then re-deposit $50K into my TFSA, and have $10K completely tax-free, yes?