Is a TFSA a "foreign trust"?

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Ruth
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Is a TFSA a "foreign trust"?

Post by Ruth »

I am a U.S. citizen living in Canada. I'd like to move money into a TFSA (high-interest savings account). However, on the back of the TFSA application, it has a "Declaration of Trust". So is this really a foreign trust by IRS's definition? If so, I'd rather avoid the onerous 3520 filing requirements.

If it's not a "foreign trust", it would make sense for me to move money into a savings account type TFSA. My husband is a Canadian citizen (only) and my income is not high enough to generate income tax liability in either the U.S. or Canada. However, by moving money into a TFSA, I'd reduce my income in the eyes of CRA, thus increasing my husband's spousal deduction.

If the TFSA is merely a high-interest savings account, it makes sense that it should be exempt from 3520 reporting. But is it?
nelsona
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Post by nelsona »

Yes. It is not only a foreign trust, it is also not sheltered from US tax.
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eortlund
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Post by eortlund »

NelsonA, I know TFSAs are considered foreign trusts if invested in mutual funds etc. But what if they are just put into a savings account? Is that different?
andied
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Post by andied »

If the TFSA is in fact a reportable trust on 3520, perhaps at some point there will an agreement in place to simplify reporting, similar to 8891 for RSP's. I am wondering if one could open a TFSA and not make a contribution, but to lock in the annual $5000 contribution limit and at some time in the future be able to "catchup", if the IRS provides a simple reporting mechanism.
nelsona
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Post by nelsona »

Its the TRUST that is reportable, regardless of what is in it. Then it is the income generated that is ALSO reportable in US.

As to catch up. You don't need to open the TFSA for you to be eligible to make catch up contributions. If you wait 10 years before opening one (resident of canada the entire time) you can contribute $50K at that time.
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andied
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Post by andied »

Thanks for the info nelsona, good to know the annual contribution will be available in the future.

I was hoping perhaps one could open a foreign trust without being subject to reporting if no assets were transferred or distributed--wishful thinking...
cfn2007
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Post by cfn2007 »

Does a TFSA holder need to file both the 3520 and the 3520A?

The 3520 is called "Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts" which seems like it would need to be filed the year a TFSA is set up and each year there is a contribution or withdrawal. So that would seem to be an annual requirement.

The 3520A is called "Annual Information Return of Foreign Trust With a U.S. Owner" which I'm guessing is also an annual requirement.
nelsona
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Post by nelsona »

Yup.
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cfn2007
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Post by cfn2007 »

I have been looking over these forms for disclosing a TFSA/trust.

The form 3520 makes sense because it is designed to be filled out by the trust/TFSA owner.

On the other hand, the form 3520A looks like it is supposed to be filled out by the bank/trustee? They fill it out and file with the IRS and then send a copy of the attached "foreign grantor trust owner statement" to the TFSA/trust owner (which then enables them to complete form 3520). Since Cdn banks are not filing these, how are we supposed to deal with this one? For example, the 3520A requires the trustee's signature.
nelsona
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Post by nelsona »

That is the problem.

Now do you understand why TFSAs are not worth it for US filers.
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cfn2007
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Post by cfn2007 »

Many people thought the TFSA would be covered by the treaty since it is substantially similar to Roth. As a result, many US citizens now have TFSA's. So I guess the question is what are the possible options?

1) Take your chances by not filing 3520 (& 3520A) and close the account as soon as possible.

2) File the 3520 & 3520A for 2009 and 2010 and still close the account ASAP.

3) Learn to file the 3520 & 3520A and plan to keep doing so annually forever.

As far as I know, the IRS has NOT made a ruling on TFSA's requiring these forms so even option #1 would probably be acceptable. Are you aware of anything official?

Certainly the prudent thing to do is file the forms and as long as you're going to take the time to learn how to do it, you might as well keep the TFSA and at least shelter some income from Canadian taxes.

I'm interested in any thoughts on how to address the situation when a USC already has a TFSA. Thanks.
nelsona
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Post by nelsona »

Yes, David Ingram has had official word from IRS, and many otherd Deloitte, etc have had the same info.

Do NOT neglect 3520.

They are NOT Roths.
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cfn2007
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Post by cfn2007 »

Unless David Ingram has something new in the last couple weeks, he said his discussions with Treasury were "unofficial". That being said, I don't doubt the importance of taking the 3520 serious. So let's eliminate option #1.

Does the TFSA make any sense over the long term with annual 3520 filings? It should still save some money annually and possibly helpful upon retirement in reducing OAS clawbacks.
nelsona
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Post by nelsona »

Depends if your planning to stay in canada.

If you leave canada you aren't subject to clawbacks.
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nelsona
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Post by nelsona »

A TFSA held by a US taxapyer is (a) not tax-free, so take that out of the equation.

So, you then have a savings account. Do savings accounts subject one to the clawback? No. Only the income generated withing the savings account could "possibly" induce clawback. Careful planning can avoid this.

Don't fall prey to the hype. TFSA is good, not great for Cdns, not so good for Americans.

Thata said, once your firm does 3520-Aa couple of times, they will get the hang of it. They will then also chrge a fee for completing it.
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