TFSA - Foreign Trust Requiring 3520 / 3520-A?

[jbregs]

Hi all,

Have a question, and I know this is a debated topic -- wanted to get your 2c.

Some context:
- TFSA held an High-Interest ETF asset through Dec 29, 2023.
- High-interest ETF asset was sold Dec 29, 2023
- There was a Dividend event on Dec 29 that triggered $144CAD dividend payment for Jan 07, 2024
- I withdrew my TFSA funds on January 02 (the liquidated holdings) and January 09 (dividend)
- There was a few days wait for settlement, but the trade event happened on Dec 29 during regular market hours.

Anyway, as for my IRS reporting obligations, are the below accurate?
- Form 8938 - report the full TFSA account at its max (January 01/02 date) as I meet the rest of the criteria for filing
- FBAR Form 114 - Report the TFSA account at its max (January 01/02 date)
- Form 3520 - $144CAD dividend distribution + final withdrawal/closing the account
- Form 3520-A Substitute- Detail the TFSA as a foreign trust/fund
- Form 1040 - Schedule B - Ordinary dividend $144CAD


Now...
I don't believe WealthSimple sent the IRS Form 3520-A (they were not informed of my US Person status as it was in the process of being closed).

However, forms 3520 and 3520-A substitute are daunting, and it's unclear if they are required.
I recognize some CPAs do not recognize TFSAs as foreign trusts, and opt for consistency with NOT filing 3520 and 3520-A.

For my part, I pulled up the account documents from signing, and it does use verbiage to classify itself as a trust:
- "Application for a Tax-Free Savings Account ("TFSA") - Trustee: The Canada Trust Company"
- "I hereby apply for a Canadian ShareOwner Investments Inc. Self-Directed Tax-Free Savings Account and request The Canada Trust Company act as Trustee of the TFSA in accordance with the provisions of the terms of the Declaration of Trust which I acknowledge having received."

Furthermore, interpretation of Rev. Proc. 2020-17 suggests that it is not exempt from filing by this note.

Is there any argument to be made for NOT reporting the TFSA on 3520 and 3520-A?
Additionally, do the 3520 and 3520-A Substitute deadlines get pushed when I file for an extension for my annual return? Looks like I will need a little more time than expected...

[jbregs]

I am unable to edit my original post, but as an update, it does seem that -- at least in my specific case -- that I require filing 3520-A.

My TFSA is with Wealthsimple & Wealthsimple explicitly specifies:
- Yes, our TFSAs are a trust arrangement and are generally considered to be foreign trusts for U.S. tax reporting purposes.

Additionally, the language in my agreement positions the account as a Trust.
1. "The Trustee must hold any investment in its own name, in the name of its nominee, in bearer form or in such other name as the Trustee may determine." (They are positioning themselves as the legal name holders of the assets)
2. "The Canada Trust Company… agrees to act as Trustee for the individual named in the application… upon the following terms and conditions" + "I request The Canada Trust Company act as Trustee… in accordance with the provisions of the terms of the Declaration of Trust" (further positioning themselves as a Trust)
3. "The Trustee will maintain the Account for the exclusive benefit and in the name of the Holder" (reinforces the trust’s purpose and structure, distinguishing it from a custodial account where I'd directly own the assets.)
4. "In the event of the death of the Holder… the Trustee shall… realize the interest of the Holder in the Account" (highlights a fiduciary duty typical of trusts, not custodial accounts)


Also, Revenue Ruling 2013-14, previously referenced by Polaristax to minimize likelihood of 3520 reporting, refers to something that has less implicit characteristics of a trust in practice...
I.e, while I control the investments (and not the TFSA Trust), they still hold the title to all the assets, and have discretionary powers around cash management and fees, unlike in the case referenced above... And the agreement I have with WS doesn't do much to provide contradiction to a Trust status.

[fadius]

I also have TFSA with wealthsimple and their chatbot did say that it is considered a Trust.
I did mention that to the cross-border accountant but despite that their response was that they don't consider TFSAs a trust and include a statement with the return explaining that "In the taxpayer’s case, the TFSA was and still is self-directed. The bank maintaining that account is simply holding assets following the taxpayer’s investment instructions. The taxpayer did not vest in the trustee such responsibility."

in my case the money is in cash, not invested and it does seem safer to just file the 3520/3520-A ... though I have no idea how to do that or how involved it is :-(

for US person residing abroad the deadline is June 16 right (same automatic 2 months extension as the 1040) ?

Got any pointers (articles/examples) that can help with filing those forms ?

[fadius]

@jbregs where did you find the wording you referenced in your post about the user agreement?
I went through the TFSA account user-agreement and couldn't find any of the text you referenced. I went through "WS Investments User Agreement" as well as "Investment Account Agreements", searched for "trust" and "Canada Trust Company" and didn't find any of that.

[jbregs]

fadius wrote:
> @jbregs where did you find the wording you referenced in your post about
> the user agreement?
> I went through the TFSA account user-agreement and couldn't find any of the
> text you referenced. I went through "WS Investments User
> Agreement" as well as "Investment Account Agreements",
> searched for "trust" and "Canada Trust Company" and
> didn't find any of that.

Hey!
I got the language from the file called "Investment Account Agreements"
My account is dated March 2020 -- perhaps your account opened under a different agreement?

Also, in my case, the money was cash as well - not invested.
In fact, I think having it holding cash only helps create an argument more for it being NOT in the shape of a trust. You're depositing $$.

I'm still of two minds with the TFSA.
Despite the language in my agreement labelling the TFSA as a "trust", I'm leaning towards leaving out 3520 and 3520-a because a defensible argument of Substance over Form can be made.

The form (labels, whatever) is that of a trust.
But the substance (I deposit / withdraw freely, I have full control over the investment decisions, I am the beneficiary, the provider can't make any decisions without my guidance) leads it to act more like a custodial account with limited fiduciary contributions.

The safest option is to file 3250-a (substitute); but it seems to be common practice to just report any FBAR and 8938 obligations (if any).


On the other hand, my wife has an ESOP that may get treated as a foreign trust requiring 3520 and 3520-a because of a $50 auto-contribution that went via payroll during an expected payment to her account... Sigh

[fadius]

TFSA with Wealthsimple was opened in 2024. End up moving the money out of the TFSA and closing it because I'm tired of stressing about it. At least it's been reported in FBARs and 8938.

I've been reading a bunch about this and yeah it's a headache. I'm going to file for an extension until October and not worry about the 3520 for now. Hoping to get additional pro opinions about it after the tax-crunch period is over and will decide how to proceed then.

Learned about 8833 form and RRSP election during my research and now I have something else to stress about (don't think 8833 was ever filed) .... it never ends lol

[formerpatriot]

@fadius, have you considered renouncing your US citizenship?
For years I stressed about my dual-citizen wife’s IRS filing obligations.
She finally renounced her US citizenship 7 years ago.
No more stress.

[jbregs]

fadius wrote:
> I've been reading a bunch about this and yeah it's a headache. I'm going to
> file for an extension until October and not worry about the 3520 for now.
> Hoping to get additional pro opinions about it after the tax-crunch period
> is over and will decide how to proceed then.

This is my plan as well!
Good luck my friend...

> Learned about 8833 form and RRSP election during my research and now I have
> something else to stress about (don't think 8833 was ever filed) .... it
> never ends lol

Ah, that's painful!
As a U.S. resident, I don't need to worry about informing the IRS about my deferrals - my understanding is that this became automatic since Rev Proc. 2014-55.
BUT if in Canada, as a Canadian tax resident, and a US citizen, yeah... that's a headache 🥲.

[fadius]

formerpatriot wrote:
> @fadius, have you considered renouncing your US citizenship?
> For years I stressed about my dual-citizen wife’s IRS filing obligations.
> She finally renounced her US citizenship 7 years ago.
> No more stress.

It is actually my wife's situation, not mine. And she's not not interested in renouncing her US citizenship so I'm stuck with the stress :)

[schwaz]

Have you seen any cross-border sites that argue against TFSA being a trust? Among other points:

"While a traditional trust involves a trustee who holds legal title to assets and manages them on behalf of beneficiaries, the financial institution administering a TFSA does not "hold title" to the assets in the same way. The individual account holder retains ownership of the assets in the TFSA, and the financial institution merely provides administrative services (such as record-keeping and compliance with contribution limits)."

"No True Fiduciary Relationship: In a traditional trust, the trustee has a fiduciary duty to act in the best interests of the beneficiaries and must manage the assets accordingly. However, with a TFSA, the financial institution does not have this fiduciary relationship with the account holder. The account holder controls the investments and makes decisions regarding the assets within the account, not the institution."

https://www.waretax.com/is-a-tfsa-a-tru ... t-so-fast/

[jbregs]

schwaz wrote:
> Have you seen any cross-border sites that argue against TFSA being a trust?

This is tricky - particularly because my TFSA agreement structures it as a trust.
It's possible one can argue substance over form, but the form my WealthSimple TFSA takes can generally be argued to be a trust.

The IRS, under Treasury Regulation 301.7701-4(a) classified a trust if:
- "Trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts."
(Legal title, protecting/conserving, fiduciary framework


Some specific language in my TFSA agreement reads:
Trustee: The Canada Trust Company
I hereby apply for a Canadian ShareOwner Investments Inc. Self-Directed Tax-Free Savings Account and request The Canada Trust Company act as Trustee of the TFSA in accordance with the provisions of the terms of the Declaration of Trust which I acknowledge having received.

OWNERSHIP: The Trustee must hold any investment in its own name, in the name of its nominee, in bearer form or in such other name as the Trustee may determine. The Trustee may generally exercise the power of an owner with respect to all property held by it for the Account, including the right to vote or to give proxies to vote in respect thereof, and to pay any assessment, taxes or charges in connection therewith or the income or gains derived therefrom.

INVESTMENT: In In the absence of a direction from the Holder as to the investment of any cash balances forming part of the Account from time to time, the Trustee will allow interest on such balances at such rate and will credit interest at such time as the Trustee, in its sole discretion, may determine. The Holder acknowledges that such cash balances may be invested and reinvested by the Trustee in the Trustee’s guaranteed account.

DEATH OF THE HOLDER: In the event of the death of the Holder where there is no Successor Holder or the Successor Holder has not been designated, the Trustee shall, upon receipt of satisfactory evidence thereof, realize the interest of the Holder in the Account.


The above statement highlight title/ownership by the trustee, its ability to invest undirected cash, and post-death duties (protecting or conserving via post-death management), which all fit into the IRS' description of a trust.


But yes, I do recognize that in the "spirit" of a trust, vs the "letter" of a trust, this, my TFSA, in practice may not fit the description, particularly due to my ability to direct all investment, withdraw, deposit, etc., as I'd like.