2008 Budget TFSAs

stewak2 · Post by **stewak2** » Wed Feb 27, 2008 12:48 pm

I'm guessing these aren't covered by the new protocol.
US Citizens residing in Canada will still be taxed by IRS on investment gains in TFSAs as if they were any other investment vehicle?

nelsona · Post by **nelsona** » Wed Feb 27, 2008 12:58 pm

The protocol was written such that instruments that are later developed by either country can be covered.

Since the TFSA is Roth-like, and Roths are now covered, TFSas would no doubt be covered too.

The real question will be if the next government will include them in their budget, since this one is probably dead.

nelsona · Post by **nelsona** » Wed Feb 27, 2008 1:01 pm

... and like Roths, it is important to only contribute to them while resident of the governing country.

cfn2007 · Post by **cfn2007** » Wed Feb 27, 2008 11:34 pm

Is the TFSA really "Roth like"? The ability to take money out at any age (without penalty) and put the money back in later on is much more flexible than the Roth. Isn't this really more of a tax free savings account than a pension/retirement account (although it could be used as such)???

nelsona · Post by **nelsona** » Thu Feb 28, 2008 6:12 am

A did say "Roth-like".

It is indeed much more flexible than Roth, with no 'qualifying period' and no early withdrawal penalty.

What is your question?

nelsona · Post by **nelsona** » Thu Feb 28, 2008 7:11 am

I do see your point. Just as CRA argued for years that Roth was not a 'pension' because it had no withdrawal requirement, IRS could argue the same for TFSA because it has no holding requirement.

stewak2 · Post by **stewak2** » Thu Feb 28, 2008 9:55 am

Also, the 401K/RRSP agreement only applies to employer sponsored plans.
Presumably, you'd need an employer sponsored TFSA?

nelsona · Post by **nelsona** » Thu Feb 28, 2008 10:24 am

The employer sponsored plan arrangement applies to the deductibility of contributions.

Since roths and tfsa's don't benerate a deduction, thta aspect of the protocol is not germane.

Instead of thrashing about, let's go to the protocol. Tto put you all out of your misery, the section that DOES apply is the following

"XVIII(3)B. The term â€œpensionsâ€ also includes a Roth IRA, within the meaning of section 408A of the Internal Revenue Code, or a plan or arrangement created pursuant to legislation enacted by a Contracting State after September 21, 2007 that the competent authorities have agreed is similar thereto...."

In other words, the IRS and CRA have to aggree that TFSA's are "similar" to Roth.

nelsona · Post by **nelsona** » Thu Feb 28, 2008 11:55 am

the only people whio have to find out how the IRS will treat these are US citizens living in canada, since non-Cdn residents should not be eligible for the TFSA.

That said, there are ananloguos situations where something that one state considered "tax-free" and other s are not required to go along.

Tax-free muni bands for example are only tax-free in certain jurisdictions. Othe US savings instruments may be tax-free for IRS, but they would be taxable in canada.

so, there is some doubt about how these may be treated by IRS, but it is obviously too early to know.

richarooca · Post by **richarooca** » Sat Oct 04, 2008 3:47 pm

As a US citizen living in Canada, I'm interested.

I searched IRS.gov for TFSA and didn't see anything.

An online bank is offering to open a TFSA account now (it would automatically become a TFSA in 2009, but for the remainder of 2008 they would simply pay double interest to cover the extra tax in 2008-- that's marketing!)

Has anyone else heard anything in regards to if it would be tax free to US?

Is it worth it alone to just reduce your Canadian liability by making more $ tax sheltered even if you still may pay US tax?

nelsona · Post by **nelsona** » Sat Oct 04, 2008 8:41 pm

Well, if your Cdn tax liability on passive income is higher than your US tax on passive income, then there is no question that a TFSA will help, just like an RRSP 'helps'.

But it will be taxable in US.

cfn2007 · Post by **cfn2007** » Mon Oct 13, 2008 9:47 pm

"Well, if your Cdn tax liability on passive income is higher than your US tax on passive income, then there is no question that a TFSA will help, just like an RRSP 'helps'.

But it will be taxable in US."

Are you referring to the interest paid in 2008 being taxable in US? Or, are you referring to all interest (including 2009 and beyond) being taxable in the US?

If it's the latter of these 2 interpretations, that seems to conflict with statements made above. I'm still working under the assumption that unless we hear otherwise, the TFSA is "Roth-like" and therefore tax free as long as the $$ was contributed while a Canadian resident. If something has changed, please advise. Thanks!

nelsona · Post by **nelsona** » Tue Oct 14, 2008 6:20 am

The interst in a TFSA will be taxable in US unless and until you here otherwise. I would NOT assume it is Roth-like until IRS says it is.

cfn2007 · Post by **cfn2007** » Tue Oct 14, 2008 7:59 pm

"The interst in a TFSA will be taxable in US unless and until you here otherwise. I would NOT assume it is Roth-like until IRS says it is."

Wow, we could be waiting forever. This leads me to two follow-up questions:

1) Until the IRS makes a statement (one way or the other), this seems like a gray area to me. Out of curiosity, if you do not declare TFSA income, what would be the potential penalty?

2) Can Canadian tax on other Canadian non-TFSA interest be re-sourced on the 1116 to cover US tax on TFSA interest?

Thanks.

nelsona · Post by **nelsona** » Tue Oct 14, 2008 8:33 pm

1. Back taxes and penalties
2. Foreign passive income is foreign passive income. It ALL gets lumped into one pile, along with its proportion of your overall Cdn tax.