Hi there,
I have recently moved back to Canada from the US, and I am now a Canadian resident. I have an American HSA that I am going to close, because I cannot use it and the monthly fees will otherwise deplete its value to 0 before I turn 65.
I believe that I need to report the remaining balance of my account as a distribution, on form 8889, and pay associated taxes. Do I also need to report anything to the Canadian government?
Thanks!
Closing US HSA as a Canadian resident
Moderator: Mark T Serbinski CA CPA
I would report it.
2 things to keep in mind: i would probably wait until 2013 to take any taxable distributions, taking enough in 2012 to cover medical expenses incurred, since this would be added to your 2012 income. If you wait until 2013, this will be your only US income, and the tax on 1040NR should not be very much, and you will have another year of medical expenses to use against it.
Any non-qualified distributions will be subject to both income tax in US and Canada and 20% additional tax in US, both of which can be used on your Cdn return towards the foreign tax credit.
How much HSA are we talking about.
2 things to keep in mind: i would probably wait until 2013 to take any taxable distributions, taking enough in 2012 to cover medical expenses incurred, since this would be added to your 2012 income. If you wait until 2013, this will be your only US income, and the tax on 1040NR should not be very much, and you will have another year of medical expenses to use against it.
Any non-qualified distributions will be subject to both income tax in US and Canada and 20% additional tax in US, both of which can be used on your Cdn return towards the foreign tax credit.
How much HSA are we talking about.
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I am in a similar situation. I have an american hsa worth $50K held in mutual funds. I am going to be moving back to Canada in the next couple years and just want to let the account sit there with no further activity, the hsa bank will allow me to do this. i am 46 and will finally take distributions from the account at age 65, then of course paying the irs and reporting in on the canadian side as well. from the time i enter canada to the time i take the distributions, the money should hopefully grow in the fund. do I have to report either to the irs or cra on a yearly basis of any of the growth of the mutual funds if do not actual receive any distributions? My thought is i can treat the hsa just like an ira or 401k plan as a canadian resident.
There is no CRA guidance on this issue.
The treaty allows one to defer taxation on "pension" accounts which meet the following criteria: "operated exclusively to pension, retirement or employee benefits". [XVIII.7] My OPINION would be that HSA's meet the "employee benefit" criteria, assuming your HSA was administered and funded through your employment.
If that is the case, then CRA requires no additional reporting through the accounts lifetime unless and until one takes distributions, and such distributions would be taxable only to the extent they are taxable in US. There is no special account reporting required in US either.
One would need to check the Cdn foreign reporting requirements from yesr to year to see if the account needs to be reported or not, but this would not be the same as, say, the special Roth reporting CRA requires, or 8891/3520 etc that IRS requires for Cdn accounts.
For US tax purposes, the big difference between HSA and IRA for non-residents is that they are connected income (rather than flat tax NEC income), which means you pay tax in US on the non-eligible withdrawals at graduated rates, rather than flat rate. Withdrawls made before 65 are penalized 20%.
So, mecahnically, one would take distribution (the manager would withold appropriately or not) and you would determine the taxable portion, report in on a return, and determine the tax, and penalty iof applicabale. Then report the same taxable potion in canada, using the calculated tax and penalty as a foreign tax credit.
ONE CAVEAT, is that while the HSA may seem to meet the "pension" definition of the treaty, in the opinion of many so did Roth IRA's, yet CRA steadfastly refused to acknowledge Roths as pensions, and required a treaty amendment before covering them, so beware that CRA could very well disqualify HSA's from any special treatment and mke them taxable year-over-year.
Until one would get a ruling from CRA that HSAs are pensions, what I've posted here is mere conjecture.
The treaty allows one to defer taxation on "pension" accounts which meet the following criteria: "operated exclusively to pension, retirement or employee benefits". [XVIII.7] My OPINION would be that HSA's meet the "employee benefit" criteria, assuming your HSA was administered and funded through your employment.
If that is the case, then CRA requires no additional reporting through the accounts lifetime unless and until one takes distributions, and such distributions would be taxable only to the extent they are taxable in US. There is no special account reporting required in US either.
One would need to check the Cdn foreign reporting requirements from yesr to year to see if the account needs to be reported or not, but this would not be the same as, say, the special Roth reporting CRA requires, or 8891/3520 etc that IRS requires for Cdn accounts.
For US tax purposes, the big difference between HSA and IRA for non-residents is that they are connected income (rather than flat tax NEC income), which means you pay tax in US on the non-eligible withdrawals at graduated rates, rather than flat rate. Withdrawls made before 65 are penalized 20%.
So, mecahnically, one would take distribution (the manager would withold appropriately or not) and you would determine the taxable portion, report in on a return, and determine the tax, and penalty iof applicabale. Then report the same taxable potion in canada, using the calculated tax and penalty as a foreign tax credit.
ONE CAVEAT, is that while the HSA may seem to meet the "pension" definition of the treaty, in the opinion of many so did Roth IRA's, yet CRA steadfastly refused to acknowledge Roths as pensions, and required a treaty amendment before covering them, so beware that CRA could very well disqualify HSA's from any special treatment and mke them taxable year-over-year.
Until one would get a ruling from CRA that HSAs are pensions, what I've posted here is mere conjecture.
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thanks for the reply. the hsa was not done through an employer. I've talked to cra and they cannot give me a perfectly clear answer. I will receive a tax form 5498-sa and 1099 from the custodian every year but contribution and distribution boxes will be $0.00, essentially not receiving any income from them. I told cra and the best they gave me was since I have nothing to report on the form as a world income source, they treat it as a kind of foreign trust in my name and I am not liable to pay taxes until i receive a distribution. the only thing is i will need to file form T1135 with the cra as a reporting document only once the value of the savings account exceeds $100k, similar to say owning a home in the US but not collecting any rent. my thought it as long as the US based tax forms report zero income, I should be fine. I will not take any withdrawls prior to 65 to avoid penalty, but I am not clear on what you meant by graduated vs flat tax rate when I final do receive the distribution?
First to your question:
Cdns recieving IRA withdrawals pay a FLAT 15% IRS tax, whether the withdrawal is $100 or $100,000.
HSA withdrawls however, need to be reported as income on 1040NR, so they are subject to graduated tax, ie, nothing for the first few thousand, 10% for the next xx, 25%, for the next xx, etc. Gradually increasing tax. This likely means, in the income randge we are talking about, that you will pay less than 15% in US on this money.
Now, as to form T1135, which is what I alluded to when I said "check the Cdn foreign reporting requirements from yesr to year to see if the account needs to be reported or not":
T1135 is used if THE TOTAL of your reportable foreign assets is greater than $100K, not only if that particular account is greater or not. Also, there are many types of accounts that do not need to be reported, including many "trusts". So, if CRA is telling you that this is a trust, then why are they telling you that it should go on T1135? If it isa savings account, then you would need to report the account on T1135 AND the interest on your tax return, even if you didn't touch it. So, which is it?
As I said at the outset, CRA has no guidance on this, including the fuzzy info that you got from their telephlunkie. (Call back tomorrow and the next day and expect to get 3 differnt answers).
At this point, I'm comfortable with the position you've decided to take. You've done what you can with CRA.
Cdns recieving IRA withdrawals pay a FLAT 15% IRS tax, whether the withdrawal is $100 or $100,000.
HSA withdrawls however, need to be reported as income on 1040NR, so they are subject to graduated tax, ie, nothing for the first few thousand, 10% for the next xx, 25%, for the next xx, etc. Gradually increasing tax. This likely means, in the income randge we are talking about, that you will pay less than 15% in US on this money.
Now, as to form T1135, which is what I alluded to when I said "check the Cdn foreign reporting requirements from yesr to year to see if the account needs to be reported or not":
T1135 is used if THE TOTAL of your reportable foreign assets is greater than $100K, not only if that particular account is greater or not. Also, there are many types of accounts that do not need to be reported, including many "trusts". So, if CRA is telling you that this is a trust, then why are they telling you that it should go on T1135? If it isa savings account, then you would need to report the account on T1135 AND the interest on your tax return, even if you didn't touch it. So, which is it?
As I said at the outset, CRA has no guidance on this, including the fuzzy info that you got from their telephlunkie. (Call back tomorrow and the next day and expect to get 3 differnt answers).
At this point, I'm comfortable with the position you've decided to take. You've done what you can with CRA.
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