What happens to my TFSA tax-wise if I renounce my American citizenship?

Do I get taxed on my TFSA if I give up U.S. citizenship?

TFSAs get good tax treatment in Ottawa, not Washington DC



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.

Related: Coming clean to the CRA

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.

Related: TFSA and RRSP investing tips for Green Card holders

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.