As discussed in a previous posting, Canadians have access to some personal savings vehicles such as the Tax Free Savings Account (TFSA), the Registered Education Savings Plan (RESP), and the Registered Disability Savings Plan (RDSP). But if you are a US citizen owning these types of accounts, you have additional reporting requirements in the US and potentially additional US tax liabilities.
Even though in Canada these accounts are tax-free or tax-deferred savings vehicles, this is not the case under US taxation laws. These accounts are considered to be “foreign grantor trusts” under US domestic law. As such, if you are a US citizen or resident and you have one of these accounts, then all of the investment earnings in these accounts must be reported and taxed to you personally on your US individual income tax return. In addition, any of the special grants received are also considered taxable income to you personally. Because there are usually no income inclusions on your Canadian tax return from these accounts but there is an income inclusion on your US tax return, you may have a US income tax liability with little to no corresponding foreign tax credit from Canada to reduce the US income tax liability.
In addition to the increased tax liability, there is an additional US compliance burden as there are specific forms that must be filed regarding these plans. US Form 3520, ‘Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts’ must be filed in any year where a US citizen either (a) makes a contribution to or takes a withdrawal from a foreign trust or (b) is treated as the owner of any part of the assets of a foreign trust under specific Internal Revenue Code sections. US Form 3520-A, ‘Annual Information Return of a Foreign Trust with a US Owner’ must be filed when a foreign trust has at least one US owner. A separate form must be filed for each account owned. Multiple TFSA accounts or RESP accounts held cannot be combined and reported on one Form 3520 and one Form 3520-A.
Registered Retirement Savings Plans (RRSP), Registered Retirement Income Funds (RRIF), and Registered Pension Plans (RPP) also fall under the US classification of foreign trusts. However, there are available elections to defer the income inclusions from these accounts on your US return until the funds are withdrawn from the registered account(s). The election to defer the income inclusion is made on a separate form when filing your US tax return.
Also, if you hold non-US mutual funds or exchange-traded funds in your foreign trust accounts, you may also be subject to Passive Foreign Investment Corporation (PFIC) reporting. Discussion of this topic will be saved for a future posting.
March 15th is the filing deadline for Form 3520-A. Form 3520 is due the date that your US tax return is due (including extensions). With these deadlines fast approaching, we advise that you contact Quon and Associates to begin gathering the paperwork in preparation for filing these required forms. If you are unable to meet the original filing deadlines, a Quon and Associates financial professional will help you apply for a six month filing extension. There can be substantial penalties in excess of $10,000 for EACH form if willfully not filed on time.