Q. I am a Canadian as well as an American citizen. I have to file income tax returns in both countries. I understand the TFSA needs to be reported. If I decide to renounce my American citizenship, what happens to the TFSA that would be different from other investments? I heard they are not tax-free. If you could shed some light on this, that would be appreciated.
– Jake Penner
A. First, you are correct, Jake, the IRS does not honour the tax-free status of Tax-Free Savings Accounts (TFSA) and any income earned inside the account is reportable and taxable on your U.S. tax return, each year.
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In addition, the TFSA may be considered a foreign trust by the IRS. If it is a trust, you will also be required to file Forms 3520-A & 3520 each year to report the account. If you own mutual funds or exchange-traded funds (ETFs) inside of any account other than a retirement account, you will need to sort out whether you are subject to Passive Foreign Investment Company (PFIC) rules annual reporting.
The next question is, if you expatriate, you will need to figure out whether or not you are a covered expatriate who will be subject to the U.S. Exit Tax (deemed disposition) of your assets, including your TFSA accounts. A cross-border tax lawyer can help you with your specific case.
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