US Citizens and TFSAs
If you are a US citizen, US resident, or Green Card holder then you have to pay US tax on your worldwide income regardless of where you live. Situations where you may be considered a US person include:
- if you were born in the US to Canadian parents
- if you were born outside the US (eg. in Canada) but have American parents
- are a naturalized US citizen regardless of whether or not you are also a Canadian citizen
If any of these describe you, you are a ‘US person’ and subject to paying US income tax. And if you have a TFSA it is considered a taxable ‘foreign trust’ by the IRS. What this means is that unlike in Canada where you don’t have to pay tax on TFSA income, you do have to pay tax on this income for US tax purposes. This rather defeats the purpose of a TFSA so if you are a US person this may not be your ideal investment vehicle!
If you choose to have a TFSA you will have to report it to the IRS. If you don’t report it, the CRA will, which started back in 2014. The IRS will look at the account balances given to them by the CRA and compare them to the reports that you should have been filing (called Foreign Bank Account Reports). If you have not been filing these annual FBARs or the numbers don’t match, expect a large bill in the mail.
Remember, filing these reports is not trivial, and may require you to hire a tax practitioner to do it correctly. These professionals will of course charge for this service, so the overall financial costs associated with being compliant with the IRS may not justify the income you are otherwise earning. It may be best to just steer clear of a TFSA if you are a US person!