TFSA and 3520

Mach7 · Post by **Mach7** » Mon Dec 26, 2011 8:59 pm

Head is swimming!

Please clarify for me.

I had a TFSA which i collapsed this year (2011).

I opened the TFSA in 2009.

The gains were not significant, but continued to put 5k in every year.

I filed my back 1040s but did not attach the 3520 form for 2009/10.

My information was that the gains were crystalized in the TFSA and would be accounted for when it was collapsed....therefore will report my couple of hundred bucks of return in 2011.

So.....was i suppposed to file a 3520 form for 2009/10?? and if so what should i do now?

I have included the TFSA on my FBARs etc...

But now worried that i did not fill in all the forms required for this account.

Also...does an ESOP (employee share ownership program) require any additional forms like the 3520?

nelsona · Post by **nelsona** » Mon Dec 26, 2011 10:22 pm

The issue is not the income - that has to be reported (yearly, not when you choose to).

The real issue is the mere existence of the TFSA as a foreign trust. You need to file a 3520 for each of the years it was in existence, including 2011.

The ESOP is only reportable if you control it.

Mach7 · Post by **Mach7** » Mon Dec 26, 2011 10:57 pm

The ESOP was initially opened by the company. They gifted some shares, and I bought some shares as well. So I suppose this would be considered under my control.

Having said that, would it be considered a foreign trust if it is held withing the company that I am employed?

If so......which forms would i fill out?

nelsona · Post by **nelsona** » Tue Dec 27, 2011 8:18 am

For income purposes these are treated lke any account with a stockbroker. For reporting, they would be the same: FBAR, with account details. Not a trust.

Mach7 · Post by **Mach7** » Tue Dec 27, 2011 6:54 pm

Thanks you nelsona.

With respect to the ESOP reporting on the FBAR. Would I check the box for "securities"? (these shares are publicly traded on the TSX for the company I work for).

nelsona · Post by **nelsona** » Tue Dec 27, 2011 9:17 pm

yes. Its not that the shares are traded, its that you have an account.

These will also need to be reported on the new foreign assets form.

waldo · Post by **waldo** » Tue Jan 03, 2012 5:01 pm

Does anyone have a reference in which the IRS specifically states that TFSAs are to be treated as trusts (i.e. a 3520 must be filed)? I can't find it, but I did find this IRS definition of a trust:

http://www.irs.gov/charities/article/0, ... 16,00.html

"In general, a trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another."

I don't see how a TFSA set up for one's own benefit could possibly meet this definition.

Thanks!

nelsona · Post by **nelsona** » Tue Jan 03, 2012 5:05 pm

The same way RRSPs are trusts.
It is the bank that holds the TFSA in a trust.

waldo · Post by **waldo** » Tue Jan 03, 2012 5:17 pm

But a bank is not a person. The definition clearly states that the assets are help by a person for another person. Do the CRA and the IRS even have the same definition of what a trust is? While the TFSA may be a "trust" by the CRA's definition, that doesn't mean it meets the IRS definition. Again, do you have an IRS reference which clearly states the ruling on this one way or the other?

nelsona · Post by **nelsona** » Tue Jan 03, 2012 5:41 pm

Your RRSP is not held by a "person" either, but it is a trust, and it is a trust by IRS definition, or we wouldn't have gone thru the 3520/8891 mess 6 years ago.

Besides, in financial matters, a trustee is almost never a "person".

Since ALL RRSPs are considered foreign trusts, I let you decide if some or all of TFSAs are a trust or not.

Keats says no, Hutcheson says yes. Ingram and RBC said yes. Take your pick.

In my opinion, they are. Just like a run-of-the-mill GIC RRSP is.

So, if you are looking for an IRS statement that TFSAs are trusts you probably won't find one. However, you won't find one that says RRSPs are a trust either, until around 2003. Yet they were always foreign trusts.

waldo · Post by **waldo** » Tue Jan 03, 2012 7:01 pm

All the points you raise are good ones. But in the absence of any clear statement from the IRS, I think my takeaway is that Americans living in Canada should avoid TFSAs like the plague until an 8891-like clarification is made available. The donation space accrues over the years, so if someone sets the money aside in another investment, they would only be out the taxes paid to Canada on the dividends and interest while waiting for clarity. Not good, but perhaps preferable for those who are especially averse to spending time dealing with the IRS. Furthermore, given the current U.S. financial situation, there's no guarantee that taxes payable to the U.S. on TFSA dividends 15-20 years from now won't be higher than taxes payable in Canada right now. Thanks for your help.

nelsona · Post by **nelsona** » Tue Jan 03, 2012 8:59 pm

I have consistently advised US citizen NOT to get into TFSAs.