US Investors in Canada: What to Watch For

Index investors in the US have always had it easier than Canadians, thanks to lower costs and more choices. Unfortunately, if those investors move to Canada, their plight becomes much more difficult.

Unlike Canada (and virtually every other western country), the US requires its citizens to file an annual return and potentially pay taxes even if they live abroad. The rules may apply even if you were born in Canada and have never lived in the US, since it’s possible to inherit citizenship from US-born parents. For tax purposes, “US persons” don’t even need to be citizens: they can also be Canadian green card holders or snowbirds.

Tax implications for US persons living in Canada are complex and often controversial: if you’re in this situation, you should seek help from an advisor who specializes in cross-border issues. But here’s a heads-up on two issues that have recently come up with clients of our DIY Investor Service who had no idea they were flirting with danger.

Don’t open a TFSA or an RESP. Tax-Free Savings Accounts (TFSAs) and Registered Education Savings Plans (RESPs) offer significant tax benefits for Canadians. But the US government may consider them foreign trusts that require additional reporting. US tax filers are also obliged to report all investment gains from these accounts (interest, dividends and capital gains) on their annual returns.

As a US citizen in Canada, it’s likely not worth it to open a TFSA at all. If you do have one, you should hire a professional to make sure you’re compliant, and that expense could offset any tax savings you might get from the account. If you’re married to Canadian, remember you can give a spouse money to contribute to his or her own TFSA: this is a simple solution for couples who are not able to contribute the maximum anyway.

For RESPs, too, the situation is easier if you’re married to someone who is not a US person for tax purposes. Simply make sure your spouse is the plan’s subscriber.

Don’t hold Canadian funds in non-registered accounts. The US imposes punitive taxes on income from what are called Passive Foreign Investment Companies (PFICs). Canadian mutual funds and ETFs are considered PFICs, and US persons who hold them in a non-registered account are now required to file Form 8621 every year. (Holdings under $25,000 may be exempt.)

Reporting PFICs is an odious task (the instructions are 13 pages long) and a tax advisor will charge a significant fee to prepare the paperwork. Moreover, you may be required to obtain an annual information statement from the mutual fund provider, and this may prove difficult or impossible. Some firms, such as Dimensional Fund Advisors, provide them on their websites (sample here), but ETF providers don’t seem to do so. [2016 Update: Some ETF providers now make these available on their funds’ web pages.]

Note that holdings in an RRSP don’t need to be reported as long as you have filed Form 8891, but if you ignored the advice against opening a TFSA or RESP, you would need to report holdings in these accounts.

If you’re a US citizen living in Canada, the easiest thing to do is simply avoid Canadian mutual funds and ETFs in non-registered accounts. If possible, hold any Canadian index funds and ETFs in your RRSP and use US-listed ETFs for your equity holdings in non-registered accounts. Even if you pay too much for currency conversion, the expense is likely to be far lower than the cost of complying with US tax law.

 

41 Responses to US Investors in Canada: What to Watch For

  1. HD June 18, 2014 at 10:28 am #

    As a US person who was born in Canada but never lived in the US, can’t you just renounce your US citizenship and avoid the hassle?

    Best,

  2. Neil June 18, 2014 at 10:39 am #

    This also applies if you are a Canadian who moved to the US (e.g. on an H1B like me).

    I have contacted both TD (e-series) and iShares about PFIC reporting and the customer reps seemed to suggest these PFIC information statements will be made available for 2014 tax filings.

    Apart from that I agree with your RESP and TFSA advice. Just too much hassle. The only suggestions I have for those moving to the US is a) close these things prior to your move, so you never have to report them b) transfer your RESP subscriber to a trusted relation (grandparent) prior to becoming a US resident. That way you keep the tax-free growth in Canada without the need to close it (non residents of Canada cannot receive contributions as RESP beneficiaries). Anecdotally you cannot transfer an RESP to a new subscriber if you are not a Canadian resident.

    All in all, I have found these challenges a good motivation to keep excellent records and to simplify holdings. Just filing the foreign account reporting (FBAR) is good incentive to close dormant accounts.

  3. Canadian Couch Potato June 18, 2014 at 12:23 pm #

    @Neil: Thanks for sharing your experiences. Good to hear that the fund providers have said they will be generating PFIC statements.

    @HD: You can renounce US citizenship, but that’s a huge decision. I would think few people will find that preferable to simply filling out some additional paperwork and making a few relatively minor adjustments to the their investment portfolio.

  4. BC_Doc June 18, 2014 at 12:41 pm #

    Thanks for the very timely article. The FATCA US-Canada IGA (which ironically comes into effect on Canada Day) and the US Treasury Department’s recent insistence on FBAR filing are guaranteed to create a big headache for Canadians with US roots and throws them into a quagmire.

    The issues related to FATCA and FBAR reporting are gaining a much higher profile as we approach July 1st. The Wall Street Journal ran a front page article yesterday on the spike in dual US citizens forced into renouncing their US citizenship due to the steep price and hassle in “complying” with the IRS.

    http://online.wsj.com/news/article_email/more-expatriate-americans-break-up-with-uncle-sam-to-escape-tax-rules-1402972439-lMyQjAxMTA0MDEwNjExNDYyWj

    Two helpful websites for Canadians who are “burdened” with dual US citizenship are isaacbrocksociety dot ca and maplesandbox dot ca

  5. Serge June 18, 2014 at 1:04 pm #

    Does it mean that there can be double taxation on the same incomes or capital gains from investment? I am a European citizen living in Canada as a permanent resident but my country, well known for its huge taxation system, doesn’t require me to report or pay anything. It would be terribly unfair to pay both the CRA and IRS for the same securities. Am I wrong?

  6. Canadian Couch Potato June 18, 2014 at 1:29 pm #

    @Serge: In the vast majority of cases, tax treaties between Canada and the US ensure that people are not taxed twice on the same income. Most of the burden on US persons in Canada comes from reporting, not from payment of taxes to the IRS.

  7. calgary411 June 18, 2014 at 2:32 pm #

    The Registered Education Savings Plan and the Registered Disability Savings Plan are similarly structured and receive Grants and Bonds. MP Gerald Keddy maintains they are NOT taxable by the US. My US tax lawyer says Mr. Keddy is just wrong.

    http://parlvu.parl.gc.ca/Parlvu/TimeBandit/PowerBrowser_SilverLight.aspx?ContentEntityId=11861&EssenceFormatID=480&date=20140529&lang=en / Mr. Keddy re RESP / RDSP and US Citizenship of Children Born in Canada to US Parent(s): start at 35:37.

    Here is my question to my US tax lawyer re how my son’s RDSP was US-taxed to me:

    The answer to your question is a bit nuanced.

    1. If the sponsor of an RDSP (or RESP for that matter) is a US person then (US person analysis of the beneficiary is irrelevant):

    a. The income generated by the RDSP is taxed to the US person sponsor currently as it is earned

    b. The grant is taxed to the US person sponsor when it is distributed to the beneficiary

    c. US person sponsor must file 3520A annually

    d. US person sponsor must file 3520 annually

    2. If the sponsor of a RDSP (or RESP) is NOT a US person, AND the beneficiary is a US person then:

    a. The income generated by the RDSP (RESP) is taxed to the US beneficiary currently as it is earned

    b. The grant is taxed to the US person beneficiary when it is distributed

    c. US person beneficiary must file 3520 annually (no 3520A)

    Neither RDSPs nor RESPs are covered by the Treaty.

    NOTE: The Canadian taxpayer helps pay for the Bonds and Grants that the Canadian government contributes to these two “foreign trusts” that should only benefit Canadians’ education savings and Canadians’ disability savings — not the US IRS.

    Here is also what the US Department of State says about my son, born in Canada, raised in Canada, never registered with the US, never lived in the US, never had any benefit from the US — a Canadian “entrapped” into US citizenship.

    My answer from Department of State, Overseas Citizens Services, Office of Legal Affairs:

    From: Kavaler, Howard
    Sent: Wednesday, May 07, 2014 9:55 AM
    Subject: RE: Question re US Citizenship never registered with the US

    If your son was born in Canada to two U..S. citizens, at least one of whom had a residence in the United States prior to his birth, your son is a U.S. citizen pursuant to Section 301(c) of the Immigration and Nationality Act. Your understanding of U.S. citizenship law is absolutely correct. U.S. citizenship is a status that is personal to the U.S. citizen and may not be renounced by a parent or a legal guardian. If your son seeks to renounce his citizenship, it will be incumbent upon him to demonstrate that (a) his action in renouncing his U.S. citizenship is the product of his own free will and (b) that he fully understands the consequences attendant to the relinquishment of his U.S. citizenship.

    which agrees with the information that I paid for from an immigration / nationality lawyer from Washington, DC,
    to confirm my son’s US status and give possibilities for his renunciation. Result was that my children were US citizens from the moment of their births. And, straight from the US Department of State:

    DOS persons he talked with have “sympathy” for such cases. However, the developmentally disabled person will have to have FULL understanding of what he’s doing; if any question of lack of comprehension and grasping meaning and importance of ramifications, they could NOT approve such a case. From DOS point of view, US citizenship is precious and they have therefore established fundamental requirements for “compelling reason”. Even though there is the risk that a person’s financial resources could run out before his/her life was over, they will never approve a renunciation for financial / economic reasons. DOS has NEVER had such a renunciation case approved due to “compelling circumstances”. I could sue – persons he talked with at DOS are SURE no one would ever win such a case as the courts view the discretionary action that DOS has would take precedence.

  8. EH June 19, 2014 at 12:22 pm #

    Thanks for the informative article. You say, “Don’t open an RESP”, but you don’t provide any alternatives. If the choices are 1. Hold US ETFs in an RESP, or 2. Hold US ETFs in a taxable account, I don’t see the disadvantage to the RESP, except for an additional IRS form to complete. Either way, the interest, dividends, and capital gains are going to be taxed, but with an RESP there is extra grant (CESG) money that is contributed. The only other choice I see is not saving for education at all, which seems worse than the filing requirements of an RESP. Thanks in advance for your input.

  9. Erick June 19, 2014 at 1:16 pm #

    My wife is a Canadian resident and a US citizen. She’s been dutifully filing US taxes (incorrectly) for several years, so we’ve hired a cross-border tax specialist to sort that mess out, along with the asset holding reporting requirements.

    Any suggestions on what to do with the investments targeted by the IRS going forward?
    – maxed out TFSA
    – legal owner of a JTWROS non-registered account – Canadian and US ETFs
    – beneficial owner of a JTWROS non-registered account – Canadian ETFs

    Her RRSP is also maxed out so, we can’t move anything into that account.

    She’s open to the idea of renouncing her US citizenship, but that comes with its own set of challenges/repercussions.

    Grateful for any guidance on how to deal with this quagmire…

  10. Ben June 19, 2014 at 3:53 pm #

    My suggestion for the issue of the RDSP/RESP/TFSA/non registered invesntment account earnings being considered taxable by the USA would be to report those earnings as required on the form 3520 or 8621 and 1040 and then exclude those earnings by putting them on line 23 (other foreign earned income) on the form 2555.

    I’m not a tax attorney but that’s what I’d do. It probably meets the test of making an honest attempt to be in compliance.

    IRS instructions on form 2555 say:

    Line 23. List other foreign earned
    income not included on lines 19-22. You
    can write “Various” on the dotted lines to
    the left of the entry space if you have other
    foreign earned income from multiple
    sources.

    Sounds a lot like RESP/RDSP/TFSA/Non-registered account income to me.

  11. JG June 20, 2014 at 1:11 pm #

    @HD: I am a Dual Canadian/US citizen living in Canada and been filing taxes in both countries for years. Denouncing US citizenship is a process and one step is an audit. So as long as you think you are clean for the past 7 years, meaning no mistakes, etc. then go for it. But I have to agree with CCP, denouncing US citizenship to avoid paperwork is fairly extreme. The treaties are set up to avoid double taxation, you just have to do more homework than the average person to ensure you make the right decisions. Plus having US citizenship is a benefit, you have access to quite a large market if you ever want to move there for work or start a business there. You might say never, but it’s hard to predict the future. Don’t get me wrong though, I do think the US tax filing requirements on its citizens abroad is horrible and should be abolished.

  12. Mike June 20, 2014 at 5:23 pm #

    @Ben: Unfortunately investment income is not earned income, so doesn’t belong on the 2555. There’s no equivalent exemption for foreign investment income.

    It’s ironic that FATCA is coming into effect in Canada just as Ottawa denounces Eritrea’s attempts to collect tax from Eritrean citizens living in Canada. Eritrea is the only other country in the world aside from the US which is arrogant enough to tax based on citizenship rather than residency.

  13. calgary411 June 21, 2014 at 3:01 pm #

    JG,

    Many *so-called* US Persons in Canada now denounce the US for what it is doing to individuals and families — and it is not *mere* paperwork. Anyone considering applying for a green card to permanently reside in the US should now be warned to do their research before entrapping themselves into complex US tax compliance industry hell. Many will renounce or relinquish their US citizenship because Canada is the country they have chosen to live, work, pay their taxes for the benefits received, and raise their families. There is NOTHING fair about US citizenship-based taxation and the implementation of the US FATCA IGA that will take place on Canada Day, July 1, 2014, deeming *US Persons* in Canada second-class to any others — no matter where the others are from or their parents’ national origin. Do you realize all of the ramifications for yourself and your family?

    You may be one who is in Canada only for work and plans to one day return to the US to live. Your choice, and rightly so, may be much different than for many, many others — including the caught-up “Accidental Americans” born to US parent(s) in Canada or to Canadian parents in the US, for one reason or another, but who returned with their parents to live their lives in Canada. They had no choice in their automatic US citizenship and its US citizenship-based taxation responsibilities!

    The US could readily solve much of this form of just more US collateral damage by changing their tax law to common-sense residence-based taxation as the rest of the world (save Eritrea). That they won’t shows their punitive ways to penalize those who chose to live elsewhere than the homeland. That CBT law comes from the Civil War days, which explains much. Yes, the US should go after their RESIDENTS who send untaxed money offshore, we all agree. FATCA will reap penalties (as opposed to taxes owed) unless one wants to enter into the ‘new and improved’ streamlined compliance program. As the other compliance programs thrown out there, bait and switch and the spider and the fly comes to mind, but must say it is good US PR just before the July 1st start of FATCA.

    I refuse to be labelled “a US citizen who happens to reside in Canada”. I am a Canadian since 1975 when I was warned by the US Consulate that I would lose my US citizenship by choosing to become a Canadian citizen. I refuse to label my Canadian-born son (to two, then, US citizen parents) ‘a US citizen who happens to reside in Canada) — never registered with the US, never lived in the US, never had any benefit from the US, only from Canada where his family chose to live. We are Canadians as most other *so-called* US Persons in Canada and should be protected by the same Canadian Charter of Rights and Freedoms as all other Canadians. Any law that “entraps” a person with some ‘mental incapacity’ into an unasked for citizenship and all of its *responsibilities* (US or any other country) has to be bad law.

    Many of those who chose Canada as our the country to give our allegiance and become part of its society believe that Canada should remain a sovereign country whose laws cannot be superseded by those of a foreign government. This Conservative government does not believe in upholding Canada as a sovereign country — that is apparent. http://www.adcs-adsc.ca/

  14. Canadian Couch Potato June 21, 2014 at 7:47 pm #

    @EH: You would probably have to to the math to get a confident answer, but I would be surprised if the additional paperwork and taxes imposed by the IRS would make an RESP worthwhile. The grant has a lifetime maximum of $7,200, and if the RESP was open for 20 years or so the cost of compliance could easily be higher than that.

    One option you did not mention is saving for education in a non-registered account using products such as GICs, which would have no reporting obligations.

    @Erick: If you have hired a cross-border tax specialist, I think your questions are best directed to him or her.

  15. Erick June 21, 2014 at 8:07 pm #

    @CCP: We’ll be running the investment question by the specialist, but I’m also interested in your opinion (and Justin’s, if he’s reading this).

    For those just starting out, your advice to avoid opening TFSAs/RESPs and Canadian ETFs in non-registered accounts is definitely worth heeding.

    I’m hoping you can also discuss options for those of us who have already accumulated assets that are in the IRS cross-hairs.

  16. calgary411 June 21, 2014 at 8:22 pm #

    Available for your research at http://citizenshipsolutions.ca/2014/02/06/pfic-taxation-and-americans-abroad/

    This submission (to the U.S. Senate Finance Committee) is titled: “Request for PFIC Tax Rules Changes for U.S. Citizens Overseas”.

    It is intended to be a further elaboration of the “PFIC rules” component of the January 17 2014 submission made to the Senate Finance Committee by Richardson, Yates, and Kish entitled “Request for Tax Rule Changes for U.S. Citizens Overseas.”

    Our first submission provided general recommendations and analysis and included only a limited discussion on the PFIC tax rules (pages 21-24). This new submission by two of the co-authors (Mr. Yates is not part of the new submission) provides a detailed and, what we believe to be, important discussion and analysis of the PFIC rules with a specific recommendation to the committee.

    The world of PFICs is extremely complicated and confiscatory. The message for U.S. citizens abroad who have purchased mutual funds (and similar investment vehicles) in their country of residence is:

    Do NOT buy more and get professional advice for how to deal with the ones you have.

    Enjoy (to the extent that it is possible when reading about PFICs).

  17. Canadian Couch Potato June 21, 2014 at 9:58 pm #

    @Erick: Neither Justin nor I are specialists in this area and it would be irresponsible of us to offer any advice. Sorry.

  18. Matt June 21, 2014 at 10:48 pm #

    I’m a Canadian with a tfsa. I might become a US citizen in the coming years as my work keeps me there. Will my existing tfsa become a complicated burden at that point?

  19. Canadian Couch Potato June 22, 2014 at 10:51 am #

    @Matt: It certainly could, and you don’t need to become a citizen for it to be an issue. Canadians with green cards are also considered US persons for tax purposes.

  20. Tyler June 22, 2014 at 3:00 pm #

    Matt, CPP: It’s worse than that. You don’t need to be a permanent resident (green card), or even have a job in the US at all. If you’ve spent more than 30 days in a year and more than 183 days in three years (previous years count for less than a full day), you’re considered a US person (substantial presence; see http://www.irs.gov/Individuals/International-Taxpayers/Substantial-Presence-Test ). My understanding is that there is a way to be exempted from this if you can show you have a closer connection to e.g. Canada, but this also requires filing a form (with acceptable evidence of this) with the IRS.

    But certainly, if someone is working in the US (even as an alien under a TN or H1B visa), they’re going to be considered a US person.

  21. plain jane June 23, 2014 at 1:44 pm #

    Erick – at my tax preparer’s recommendation I closed my TFSA. I decided to make a lump sum prepayment against my mortgage (RRSPs maxed out) with most of the cash.

    There were several “unsophisticated investor” letters to the IRS, and I didn’t have to pay any tax or penalties. There had been minimal growth in my TFSA because it was my emergency fund (high interest savings account), which may have helped.

  22. Adam June 25, 2014 at 1:02 pm #

    Thanks for the information. I’m a US citizen living in Canada (permanent resident, wife and daughter are citizens). Based on this article, I’ll be deregistering my TFSA. One clarification, do I need to sell all the ETFs in my TFSA first?

    It’s mostly your recommended funds like HXT, XEF, XEC etc. Since they are all Canadian listed, do I need to sell them a us-listed equivalent?

    Appreciate your help.

  23. Canadian Couch Potato June 25, 2014 at 1:38 pm #

    @Adam: I can’t advise you specifically. But if you are de-registering a TFSA it will become a non-registered account, so you would then be in the same situation as other US persons when it comes to PFICs (i.e. holding Canadian mutual funds/ETFs in a non-registered account). That would require additional reporting to the IRS.

  24. Erick June 25, 2014 at 2:07 pm #

    @plain jane: Thanks for sharing your solution. Once I figure out what we’re going to do, I’ll post the details.

  25. Adam June 25, 2014 at 2:11 pm #

    I’m not sure I understand, you said above: ” If possible, hold any Canadian index funds and ETFs in your RRSP and use US-listed ETFs for your equity holdings in non-registered accounts.”

    I have canadian funds in my RRSP and I would be planning to purchase US-listed funds for the non-registered account. Does that address the problem?

  26. Canadian Couch Potato June 25, 2014 at 2:31 pm #

    @Adam: Yes, that would address the problem.

  27. Fred Ziffel June 28, 2014 at 4:35 pm #

    Canadian Couch Potato wrote:
    “For RESPs, too, the situation is easier if you’re married to someone who is not a US person for tax purposes. Simply make sure your spouse is the plan’s subscriber.”

    Comment:
    There are grants and bonds available to low income people but only if BOTH parents are subscribers. With several children, this could add up to thousands of dollars. Poor people get the short end of the stick again!

    Question:
    Do the reporting requirement being imposed on the Canadian banks July 1 (i.e. asking about American citizenship) also apply to credit unions or, for example, in Alberta, the Alberta Treasury Branch? Could dual citizens find a safe (non-reporting) haven for their money in financial institutions under provincial jurisdiction?

  28. Fred Ziffel June 28, 2014 at 5:40 pm #

    The following would seem to indicate that TFSAs and RESPs will not be reported by Canadian banks?

    From the Canadian Bankers Association website:
    http://www.cba.ca/en/consumer-information/40-banking-basics/597-fatca-and-the-canada-us-intergovernmental-agreement-iga-information-for-clients-

    Will financial institutions have to disclose information about registered plans?
    The following registered plans will be exempt from reporting:
    Registered Retirement Savings Plans (RRSPs)
    Tax Free Savings Accounts (TFSAs)
    Registered Disability Savings Plans (RDSPs)
    Registered Pension Plans (RPPs)
    Registered Retirement Income Funds (RRIFs)
    Pooled Registered Pension Plans (PRPPs)
    Registered Education Savings Plans (RESPs)
    AgriInvest Accounts
    Deferred Profit-Sharing Plans

  29. calgary411 June 29, 2014 at 10:57 am #

    Correct. TFSAs, RESPs, RDSPs are not reportable by the banks to the Canada Revenue Agency (CRA) to then be handed over to the U.S. IRS.

    However, the INDIVIDUAL still has the reporting responsibility re US citizenship-based taxation law, supported by the Canadian implementation of omnibus Bill C-31 intergovernmental agreement with the U.S. The exception is only for Canadian banks and other financial institutions. It is not for the individual.

    Listen to this for further explantion of what FATCA is: http://www.cbc.ca/player/AudioMobile/All+in+a+Day/ID/2468183911/

  30. Be'en September 18, 2014 at 3:40 am #

    I was granted a US green card about 10 years ago, but never moved to States to take up residency.

    I have been a permanent resident of Canada since 1994 and don’t intend to move to US.

    Since I did not move to US, is the green card deemed invalid now and I needn’t worry about reporting to IRA, or would I need to “renounce” it?

    Dan, I realise that you may not have an answer to this but am hoping that someone reading this blog might know something.

    Thanks.

  31. calgary411 September 18, 2014 at 3:47 pm #

    http://blogs.angloinfo.com/us-tax/2012/12/31/giving-up-your-us-green-card-make-sure-it-is-done-correctly-or-pay-the-price/ is a very good explanation about giving up a US green card, for which there are the same tax and reporting returns; i.e. the same “responsibilities”, as US citizenship.

    From CRA: http://www.cra-arc.gc.ca/tx/nnrsdnts/nhncdrprtng/ndvdls-eng.html

    Q: I hold a U.S. green card. How does this affect my tax residency?

    A: If you are a green card holder (that is, a lawful permanent resident of the U.S.), the U.S. considers you to be a U.S. resident.

    However, if you are a resident of Canada for tax purposes and do not hold U.S. citizenship, you should not identify yourself as a U.S. person to your Canadian financial institution.

    ****************
    Thus, you *may* be able to stay below the radar of identification as a *US Person*.

    You and any others reading this might also consider helping in the fight for what this means for those deemed by the US *US Persons* in Canada, along with other Canadians, concerned about Canadian sovereignty with implementation of the FATCA IGA. Constitutional lawyer, Joseph Arvay, is working on this case. Donations are accepted at http://www.adcs-adsc.ca/.

  32. Be'en September 18, 2014 at 8:11 pm #

    @calgary411,

    Thanks. The links are very useful. I should at the very least give up the green card. It does not serve any useful purpose for me.

  33. calgary411 September 18, 2014 at 8:40 pm #

    Research thoroughly because you do not want to be deemed a U.S. “covered expatriate” in completing Form 8854.

    (It’s too bad that persons obtaining US green cards do not also get full disclosure of the consequences of having one, as well as any of the benefits.)

    http://www.expertlaw.com/forums/showthread.php?t=58098

    Re: Form I 407 and Form 8854

    In general terms,
    Quoting State Department Information
    What If I Surrender My Green Card?

    Generally, if you surrender your green card during the taxable year, your tax status as a resident alien will terminate on the last day of that calendar year. However, if you can establish that, for the remainder of the calendar year, your tax home is in a foreign country or you maintain a closer connection to that foreign country than to the United States, your residency termination date will be the date you surrender your green card.

    If you are a resident of the United States because you meet both the substantial presence test for the taxable year and have a green card during the taxable year, your residency termination date will be the later of the date you surrender your green card or the last day you are physically present in the United States, provided you can establish one of the exceptions above. See Pub 519 (U.S. Tax Guide for Aliens) and the instructions to Form 8840 (Closer Connection Exception Statement for Aliens) for additional information.

    If you are a nonresident alien as of the last day of the year and a resident alien for a portion of the year, you should file a Form 1040NR even if you have no U.S. source income and attach a copy of Form 1040 that reflects your income for the period of the year that you were a resident alien.

    What if I am a Long-Term Resident When I Surrender My Green Card?

    If you are a long-term resident of the United States, defined as an individual who is a U.S. lawful permanent resident in at least 8 of the prior 15 taxable years prior to the termination of permanent resident status, there are special rules to comply with. Your residency termination date will not occur until you file a completed Form 8854 with the IRS and notify the Department of Homeland Security of your termination of residency, notwithstanding that for the remainder of the taxable year your tax home is in a foreign country or you have a closer connection to a foreign country. Until you file Form 8854 with the IRS and notify the Department of Homeland Security of your termination of residency, your termination of your permanent resident status for immigration purposes will not relieve you of your obligation to file U.S. tax returns and report your worldwide income as a resident of the United States. For purposes of U.S. tax rules, the date of your termination of residency will be the later of the date you notify the Department of Homeland Security or the date Form 8854 is filed with the IRS in accordance with the instructions for the form.

  34. calgary411 September 22, 2014 at 12:42 pm #

    Further re your green card situation, http://www.forbes.com/sites/robertwood/2014/09/22/armed-with-fatca-irs-hunts-offshore-tax-evaders-while-canada-eases-up/

    America taxes its citizens and permanent residents on their worldwide income regardless of where they live.

    Think about that for a second. If you had a green card and left the US (OR NEVER LIVED THERE). Until you give up that card in the proper way your expected to file and pay taxes. Have it too long and you have to expatriate in pretty much the same way as citizens (pay the exit tax if you have money). So you can have an expired green card giving you no rights to work in the US but the US thinks it reasonable to tax you! That’s pretty arrogant in my book.

    Reply
    Author
    Robert W. Wood Robert W. Wood, Contributor

    The green card situation does seem unfair in the situations you describe. And I have seen it happen. I think some non-citizens get a green card and then assume it is better to keep it even though they move back overseas. And the green card is a conclusive presumption of US permanent resident status. Presence is irrelevant.

  35. Ryan April 5, 2017 at 10:52 pm #

    Does tfsa need to be reported on US taxes for an American living in Canada,, if they never turned it into an investing tfsa? Just saving?

  36. JG April 6, 2017 at 10:00 am #

    @Ryan. Yes, savings still earns interest and one still has to pay tax on interest earned in a savings account in the US. TFSA is a special Canadian savings or investment account in which they don’t tax the interest earned. US sees this as a foreign trust and you will have to file additional paperwork and pay US tax on the interest. It does not matter how the interest was earned (savings, CDs, bonds, stocks).

  37. Neil April 6, 2017 at 10:57 am #

    Even if no tax is due you have 3520 and 3520a reporting requirements. For a simple account like a cash only GIC the accounting and paperwork is involved but not complex.

  38. Ryan April 6, 2017 at 7:54 pm #

    @JG Thank you for the reply.

    As someone mentioned above, can I put my small fee from interest on form 2555 on line 23?

    IRS instructions on form 2555 say:

    Line 23. List other foreign earned
    income not included on lines 19-22. You
    can write “Various” on the dotted lines to
    the left of the entry space if you have other
    foreign earned income from multiple
    sources.

  39. Ryan April 6, 2017 at 8:07 pm #

    @Neil, thank you also for the reply.

    I was reading http://www.huffingtonpost.ca/cleo-hamel/taxfree-in-canada-doesnt-_b_9017062.html and at the very bottom it says:

    TFSAs can actually be detrimental to people with U.S. filing obligations depending on how the account is structured. TFSA deposits do not have to be held in savings accounts. Canadian financial institutions are offering more options to accelerate the growth of the deposits which can now own stocks, mutual funds, segregated funds or a mix of investments. If your TFSA is set up so you can own these types investments then it is considered a foreign trust requiring two forms each year – F3520 and 3520-A.

    My TFSA did not have GIC, investments, etc. It was strictly a cash account for saving. So since my account is not a considered a foreign trust, can I just put the interest earned on a Form 2555 (line 23) and not have to worry about the F3520 and 3520-A??

  40. Neil April 7, 2017 at 3:10 am #

    I believe the IRS still considers it a trust, just not an exciting one. You should get advice from a good cross border accountant – Serbinski seems like a starting place.

    If you aren’t using the tax free growth part of the TFSA I would just not bother.

  41. Jeff April 7, 2017 at 3:46 pm #

    @Ryan. Thanks for sharing the article, very good source of information. I found another reference:

    https://hodgen.com/canadian-tfsas-and-the-certification-test/

    I guess my personal opinion from all that I read is that it is a grey area with many different opinions and the IRS has never officially taken a stance on TFSAs. So I have personally avoided them as a dual Canadian/US citizen.

    But I imagine if all you are doing is earning a fixed interest in a TFSA, you are not paying taxes in Canada on it, but report the interest and pay taxes on it to the US, then perhaps the IRS won’t have a problem with it. But you can’t be sure, so it is a risk once decides to take or not.

    But I don’t think there is a benefit of a TFSA that you pay US tax on over a regular savings account you pay Canadian tax on. You pay tax on both, so you lost the benefit. You don’t pay more tax on the regular savings account because the Canadian taxes paid can be used as a tax credit in the US.

    So just get a normal savings account, pay CAD taxes on the interest, use these taxes as a credit in the US, and avoid the uncertainty (https://www.highinterestsavings.ca/chart/).

    The real advantage of the TFSA is that it is essentially an RRSP without the income tax deduction. So you can invest in it and have all the earnings grow tax free, unless of course you are like us and have US tax obligations.

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