Taking stab at 3520, -A for TFSA

[MGeorge]

I used this thread again as well - I really appreciate it.

[worryfreeinvestor]

Would I be correct in stating that if a US citizen moves to Canada, he should never open a TFSA?

[nelsona]

NEVER may be too strong, but unless you can insure that other Cdn passive income tax will cover the US tax on the gains in your TFSA year after year, and unless you don't mind the PFIC/3520 hassles, I would avoid it.

[worryfreeinvestor]

Thank you. I am afraid I do not follow the term "passive income tax". Does that mean income tax on ono-sheltered investment income, e.g. coupons, dividends, capital gains?

I have not yet filled out a PFIC or 3520 so my question is very basic. I plan to do a "mock" tax return shortly so I suppose it will become clear to me.

Are you saying that if I pay Canadian income tax on investment income of $1,000 and have gains of $900 in my TFSA, I won't have to pay US tax on the $900?

[MGeorge]

Hi worryfree,
I think when you do your practice income tax return you'll come across the term "passive income". It is an important topic when you do your foreign tax credits using form 1116. For a USC in Canada, taxes paid to Canada are generally put into one of the following 2 "buckets" when applied to a US tax liability.
"Passive Income" is: Dividends, interest, capital gains, rents, and annuities.
"General Income" is everything else with a few exceptions. For most people, general income may include: working income, tips, pensions, government grants, employment insurance payments - these are some of the common ones.

What nelsona was referring to: sometimes a USC can pay no tax on his TFSA income if there are sufficient excess foreign tax credits that can cover the US tax liability from the TFSA.
An example:
Say I have $5000 in a taxable investment account.
And I have $3000 in a TFSA.
Both account generate dividend income of 10%.
I owe Canada tax on $500 div. income from the taxable account, say my tax rate is 20% on average for dividents, then I pay canada $100.

On the US side, taxes are lower. Let's say my tax rate for qualified dividends is more like 8%. Then I owe the US tax on $800 of dividends (ie. from both accounts). My US tax liability if $64. But, I can take a foreign tax credit for $100 - this will wipe out all US tax liability and I'll be able to carry forward the remainder.

The key here is "passive" income is separate from "general" income. So, if you made $100k at your job, you can use the large excess foreign tax credit for your work income to offset investment income.

I hope this helps. Regards.

[nelsona]

I think George had typo:

The key here is "passive" income is separate from "general" income. So, if you made $100k at your job, you canNOT use the large excess foreign tax credit for your work income to offset investment income.

you cannot mix passive and general tax credits.

[MGeorge]

Thanks nelsona - that was a typo!

[cantax14]

Thanks for the great thread, everybody. I'm struggling with these forms right now too.

What happens if a Canadian already had a TFSA when he moved down? (Dual status)
1) Is the whole year's income reportable on the 3520/3520a/1040, or just income for the period that he was a US resident?
2) Is the date of opening of the trust the actual Canadian date several years back, or the date of becoming a US resident this year?
3) Is there a "contribution" on the date of residency to fill the trust with money, or is it just considered to be there already even though it's the initial filing?

Thanks so much!

[malachirobertson]

I am trying to fill these forms out for TFSA that was owned by my deceased mother-in-law. There was interest on the account and then it was closed by executor of the will, her nephew in Canada, and the monies transferred to the beneficiary, my wife, a US citizen.

It is not clear to me where on 3520 I report this situation Is the interest noted somehow on 3520? Or do I just note the final distribution/dissolution of the account? Does the interest amount only come into play on 3520a?

I also have a question about the EIN. I have an EIN for the estate. Do I use this EIN for the TFSA or do I need to create a separate EIN for the TFSA?

Thanks

[malachirobertson]

One more question, who signs in the trustee spot of the 3520a, when the trustee (ING in this case) does not file the 3520a for you and in fact probably does not recognize the account as a trust?

[malachirobertson]

Ok, so the interest is somehow noted on 3520/a (see past questions). How is this interest reported on 1040/1041?

[CdnAmerican]

The interest amount just goes on the interest line of the 1040 (line 8a), I believe. You may also have to file it on a Schedule B, and if so, don't forget Part III of it. (It's easy, but also easy to miss.)

[hello3520]

I closed my TFSA account in 2014.

On the 3520-A I am going to report the withdrawal amount (Trust Corpus) as a distribution on 3520-A, Part II, Line 17 a + b.

For Part III of the 3520-A I am going to have the balance sheet go to zero.

Is my treatment consistent with what others have done when closing a TFSA?

[Buddy]

I closed a TFSA in 2013 and filled out Parts II and III of 3520-A exactly as you propose to do and received no complaints.

In addition the "Final return" box should be checked on form 3520 (in row A at the top of 3520).

[kylewkemp]

So after reading the forum I am still confused about how to fill out 3520-A Part III Foreign Trust Balance Sheet properly for a TFSA. Here is my take let me know if I've gone astray somewhere:

Assuming for simplicity that TFSA holds cash and we only consider contributions to the trust, withdrawals and interest then:

Line 1=Line 11 and are the respective beginning and closing balances in the account.

Contributions should be the total from Part I Schedule B on Form 3520 and should go in column b). Accumulated Trust Income is the interest earned by the trust from Part II.

Where then do we include the value of the withdrawals (Distributions) from Part I 17 a+b to make the beginning and ending values balance? Should this count as a liability?
Should all transactions go in column b) and column d) should just carry through line 11) down to line 21).