Can I Put Money Into Tfsa As Canadian Working In Usa

Avoid cross-border pitfalls with TFSAs

U.Southward. taxation rules tin can lead to TFSA troubles

• By: Jacqueline Power
• July 9, 2021 July 9, 2021
• 15:11

© eyfoto / Thinkstock

Jacqueline Power

Canadians have taken advantage of the revenue enhancement-free savings account (TFSA) since its introduction in 2009. Yet, in that location tin be taxation consequences for Canadians who agree foreign investments in TFSAs. In addition, U.Southward. persons may face tax consequences when investing within a TFSA.

Let's first expect at your Canadian (and non-U.South.) clients and how tax tin apply to their TFSA investments.

It's possible to hold foreign investments in a TFSA and have no Canadian revenue enhancement employ on dividends paid to the account. However, withholding tax applies.

For instance, the Internal Revenue Service (IRS) generally applies withholding tax of 15% (30% in some cases) on dividends paid to a TFSA. If your client invests in a stock that pays a $400 dividend with 15% withholding tax, $340 would be deposited to their TFSA. The customer would be unable to recoup the withholding taxation in the grade of a foreign taxation credit considering no tax would be paid in Canada. This means they substantially lose a portion of the dividend.

If, on the other hand, your customer holds the U.S. dividend-paying stocks in a non-registered business relationship, they'll have access to a foreign tax credit. (With the non-registered account, if the investment has a toll footing greater than $100,000 at any time in the year, the client must consummate the T1135 Foreign Income Verification Argument.)

Some other selection is to have your client agree U.S. dividend-paying stocks in a retirement account. When U.S. dividends are paid to an RRSP or RRIF, withholding tax doesn't apply considering the IRS recognizes the account as a tax-deferred retirement account nether the Canada-U.Due south. tax treaty.

Now, allow'south look at issues that tin arise for a U.Due south. person.

A TFSA isn't considered taxation-gratis in the U.Due south., and so U.South. persons must pay U.Due south. income taxes annually on the account'due south income and capital gains.

Information disclosures are as well necessary. A TFSA is considered a foreign trust, and the IRS requires that Form 3520 Annual Render to Report Transactions with Strange Trusts and Receipt of Certain Foreign Gifts and Form 3520A Annual Information Render of Foreign Trust with a U.S. Owner be filed annually. A tax preparer will likely charge an additional fee to file these forms.

(Note that RESPs and RDSPs are also considered foreign trusts, just the 3520 and 3520A reporting requirement was eliminated for those accounts in 2020.)

If the customer'south non-U.S. accounts full more than US$10,000 at any fourth dimension during the twelvemonth, a Report of Foreign Depository financial institution and Financial Accounts (FBAR) Form 114 must be completed detailing all foreign accounts they agree including the TFSA. Depending on the customer'south net worth, other IRS information disclosures may be required.

If the TFSA invests in a passive foreign investment company (PFIC), additional reporting will exist required. A PFIC is a non-U.South. corporation that has passive income of 75% or more than of its gross income, and 50% or more of the corporation's assets produce passive income, which more often than not includes rents, annuities, interest, dividends, royalties and capital gains. Canadian mutual funds and ETFs are considered PFICs.

U.South. persons property PFICs would generally be required to file IRS Form 8621 Information Return past a Shareholder of a Passive Foreign Investment Visitor or Qualified Electing Fund annually with their U.S. revenue enhancement return. To assist with the reporting requirement, some Canadian investment firms provide annual information statements (AIS), which allow the investor to brand a qualified electing fund (QEF) election and obtain preferential tax treatment, fugitive high revenue enhancement rates and interest charges. With the QEF ballot, income generated in the PFIC is mostly taxed as ordinary income, and capital gains are taxed as capital gains, which allows them to be treated more revenue enhancement-efficiently.

Another do good to the QEF election is that income and uppercase gains are taxed in the yr they're received and not allocated to previous years.

The QEF election is available only if the Canadian mutual fund provides the AIS.

The fact that the investment income in the TFSA is taxable in the U.S. only cannot be recouped in Canada as a foreign revenue enhancement credit makes the TFSA less bonny for U.S. persons living in Canada.

Even though the TFSA is generally an excellent account blazon for tax-complimentary savings, it's not a perfect fit for everyone. Information technology's of import that your clients are enlightened of the tax issues that could ascend, whether they're invested in U.S. dividend-paying stocks or if they're a U.Southward. person.

Jacqueline Power is an banana vice-president with Mackenzie Investments. She can be reached at jpower@mackenzieinvestments.com.

Source: https://www.advisor.ca/columnists_/jacqueline-power/avoid-cross-border-pitfalls-with-tfsas/

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