TFSA Closure before moving to the US

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Sid
Posts: 10
Joined: Sat Oct 17, 2020 6:07 pm

TFSA Closure before moving to the US

Post by Sid »

Hi,
I have a question, if i close the TFSA account with capital gain in March and then in April move to the US for work, would I be paying taxes in US on capital gain on TFSA? do I have to file any forms to disclose TFSA with the IRS? do I need to mention that i have closed the account on form 8938 for year 2021?

When you trade stocks on RRSP while US tax resident, do I need to keep track on invidual stock it terms of how much capital gain or loss? Or simply when i withdraw RRSP in the future, IRS and CRA taxes at that time?

ALso, I am confused about filing " Dual status alien" tax with the IRS. I thought in my scenario, if I move there in April, i would be filing only a regular resident return 1040, because of passing substantial presence test. DO i have to file january to march return as NR with IRS too?

I hope to get reply from knowledgeable people. I spoke to accountants, I get different response from different people. Very frustrating.

Thank you
nelsona
Posts: 16673
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: TFSA Closure before moving to the US

Post by nelsona »

Whether you pay tax on income generated in your TFSA depends on when you become "taxable: in US. In your first year of living in US, you have the choice (even if you meet SPT) to either file full year, making jan 01 your start date (1040), or filing part-year (dual-status 1040NR and 1040) using your arrival date. In MOST cases one chooses the full year as it yields better overall tax rate.

So, if you have TFSA income in 2021, what you declare in US will depend on that choice.

The same principle applies to your RRSP, as future taxation depends on the "book value" at the time you become a tax resident (see the choice above). Whatever increase in value from that date you have will be taxable in US when you withdraw funds (assuming you are still taxable there).

So, there is for you, considering moving in April, some advantage to selling any winners in both your TFSA and RRSP before year-end, so you won't have to consider that when choosing ahish way to file your US taxes for 2021.

If your TFSA exists at any time during 2021, assume it will be subject to FBAR, FATCA and trust reporting.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D
Sid
Posts: 10
Joined: Sat Oct 17, 2020 6:07 pm

Re: TFSA Closure before moving to the US

Post by Sid »

Thanks Nelson for the reply~
I am at a loss on one stock and that stock will likely recover in 2021, so that's why I am not closing TFSA account this year 2020.

So, I guess as you mentioned, it would be advantageous from tax perspective to file 1040 for 2021 even if i am part resident for that year. Do you know what cost basis i will use for stocks in TFSA? when I bought the stocks in 2020 or what the value was at January 1 , 2021?

I found out yesterday from a CPA that IRS no longer requires 3520/A for TFSA starting Nov 2020, and the agency passing that guidance to its agents. I am expecting to see that in writing in near future.
Sid
Posts: 10
Joined: Sat Oct 17, 2020 6:07 pm

Re: TFSA Closure before moving to the US

Post by Sid »

My question was not clear.

If i keep stocks in TFSA , and then sell those stocks in March 2021. Will I use the Fair market value of those stocks that was on Jan 1, 2021? to calculate gain/loss assuming i am choosing to file FUll year resident tax with IRS?
Sid
Posts: 10
Joined: Sat Oct 17, 2020 6:07 pm

Re: TFSA Closure before moving to the US

Post by Sid »

I am sorry for multiple posts.

In RRSP, I understand what you are saying. But what if I buy and sell certain stocks , and not withdraw funds. But when I do withdraw funds after few years, do I need pay tax on appreciated value from Jan 1 2020 to whenever i sold it? My understanding is, you can buy and sell in RRSP, when you withdraw , you pay 25% tax to CRA, and take that amount as tax credit from IRS as Foreign tax credit. I know if you hold the stock for more than a year, than the tax is 15% , is that apply to RRSP too? If you can clarify that, i would greatly appreciate. ALso, if you point to a good article that talks about this topic.
nelsona
Posts: 16673
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: TFSA Closure before moving to the US

Post by nelsona »

Cost basis in your TFSA is the "normal" cost basis: roughly the original buying price, plus any dividends distributed. It is not the value when you become US taxpayer. Same for RRSP, the "book value" of your RRSP is not the market value, it is the cost basis. Neither TFSa or RRSP are affected by deemed disposition rules, so there is no resetting of the cost basis for US tax purposes when you move

RRSP withdrawals are treated like pension income, not investment income. So the taxable portion will be the increase between the time you moved til the time you withdraw funds FROM the RRSP, not internal trades and distributions, etc.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D
Sid
Posts: 10
Joined: Sat Oct 17, 2020 6:07 pm

Re: TFSA Closure before moving to the US

Post by Sid »

Thanks Nelson to attempt to explain to me.

I feel so dumb. This is very confusing, I have spoken to two accountants , they both said that you use "step Up" basis when you move to the US. In other words, You may have bought stock for a $1 few months ago, but let's say if you move to the US on March 1, 2020, and at that time the value of that stock $2, you would take that $2 as basis and when you sell the stock for $5, your gain would be $2 ( $5 -$2) and you would pay tax on $3.

I also asked the accountant if I have to sell appreciated stocks and buy before moving to the US, as it was mentioned in these forums. The accountant said NO, you will have "step up" cost base the time you move to the US.

Accountants charge ridiculous amount for simply entering numbers on software, if i had the understanding of TFSA and RRSP, i can easily do myself.

I am very confused. Do you have any article or reference that discuss this topic?
nelsona
Posts: 16673
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: TFSA Closure before moving to the US

Post by nelsona »

The accountant is incorrect. US does not have a notion of "deemed disposition or acquisition" like Canada does, That is why there is a specific treaty clause that grant "step-up", but only to investments that HAVE been deemed disposed. TFSA and RRSP investemnt are NOT deemed disposed.

This forum is the reference.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D
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