13 thoughts on “Guess when a Canadian TFSA is not really tax exempt?”
So what?
The same rule applies to US citizens with “tax-free” IRA accounts holding foreign securities that pay dividends subject to foreign withholding.
If you cannot get a refund of the withheld tax to the extent it exceeds the allowable treaty rate (if any), the money is lost.
Spain withholds 19% but the treaty rate is only 15%. Anyone here willing to go through the hassle of applying for a refund of the 4% difference?
How much of your remaining lifetime are you willing to spend trying to get the withholding-treaty rate difference back from the exceedingly sticky-fingered French or Italian tax authorities?
The Swiss withhold 35% regardless of the treaty rate but at least they offer a fairly quick – if not simple – refund procedure.
At least the US allows its source withholding to be reduced to the allowable treaty rate – and asks for no greater assurance of treaty eligibility than a signed W-8BEN form.
Bottom line: think before you invest – or badmouth the USA.
@todundsteuer, Yeah, nothing really new here. It’s the same for UK ISAs and SIPPs, approximately equivalent to TFSAs and RRSPs respectively.
I.e., invest in Canada with your TFSA. That’s why the Canadian government set this thing up.
But what makes me more angry is that the TFSA is taxable in the United States when you do your “voluntary” tax return. I relinquished over this and HEROES (exit tax–get out while the getting is good). I suppose I will be exiled from returning to the US as a tax dodger under the Reed Amendment. Or I will be picked up at the border as a violator of the Bank Secrecy Act. I think I have just cause for saying that the United States has treated me and most other American expats ill. Of course, the persecutor Timothy Geithner apparently received a pardon. And Barack Obama, who was advertising that he was Kenyan-born in 1991, is his boss. So we have an usurper in office, but we are not allowed to bad-mouth the USA. Why? Because drone is going to take us out? One day, if I stop blogging, everyone will know why.
The US tax system is not geared up for refunds like in Europe. Most European tax systems (not France’s it’s pretty complex with 1% deducted for one thing, and .7654% for another, and it doesn’t operate PAYE at all) have some kind of PAYE system where you’re assigned a tax code. The goal is to keep you and the taxman “even” throughout the year so you haven’t grossly “overpaid” tax for that year. For payroll, you are able to get a “tax refund” during any time in the tax year by paying negative tax for that week.
To my best knowledge, the IRS is only geared up for the once a year refund post-April, and collecting quarterly payments from corporations and self-employed individuals.
Refunding money quickly and mid-year would be a departure from IRS’s normal course of business.
Oddly enough refunding withholding tax quickly has never been mentioned by the IRS or how they would even do it. Foreign investors will not wait until April next year for a refund because the IRS can’t adapt its system, this will increase FATCA’s negative effect on the US economy.
I’m sure the fraudsters will figure a way to get phony refunds out of the IRS as well. Between fraud and pi**ed off investors (especially Europeans who expect to get money back quickly) US inward investment probably will drop initially and hopefully never return to teach Levin and others like him a lesson about World 2012 and the US’s new role.
The IRS will struggle as I’ve mentioned before with the following:
– Data Integrity (people using doctored passports etc) to conceal the US as their place of birth to FFIs or even their real identity so the data never reaches the IRS to begin with
– Dual citizens closing down bank accounts in their real name, changing their legal name in Europe and re-opening accounts with their new identities and supplying erroneous W2 information if necessary. When the IRS goes to match it up it will always be an exception, turning it into a full scale manual investigation for the IRS which they won’t be able to go to some database to get a quick answer. If years later the heat gets too much, repeat the process over again. If someone is hard headed enough they’ll exploit the data integrity issue to the max.
– A foreign bank manager who is willing to put down another place of birth for you regardless what your passport says.
– Quick refunds of FATCA withholding tax mid-year wrongly held and refunded months later by the IRS
I very much doubt the IRS is going to be able to rely fully on data from the 175+ countries provided by some guy in a run down old building in the Yemen or even Europe. Hey they could’ve made a mistake on the “place of birth” section on the computer screen. Who’s going to be punished for such a mistake and what are the chances of it being caught once it’s in the system. It’s unlikely governments or FFIs will accept a future US government’s suggestion they should re-check everyone’s identity annually.
Think of this is practical terms, what problem will it really be to the local tax authority or the FFI if you committed a white lie to avoid FATCA and it goes undiscovered for years?
Congress seems to think FATCA is some kind of magical panacea, it isn’t. If you make FATCA a manual difficult unprofitable process with garbage data for the IRS someone someday is going to say at 1111 Constitution Ave this is dumb and it will quietly start playing lip service to Congress that they are actually enforcing it. How is Carl Levin to know either way?
If Levin kicks up what is he going to do about it? Pass another law like the knee-jerk reaction those clowns Schumer and Casey had about Saverin the other day?
The biggest danger is FATCA is going to become the US law foreigners will pay lip service to and don’t really care if the data is correct or not except for what their own government wants. Entering the wrong place of birth will not affect the local government’s ability to collect their own tax. The local government is more interested in correct tax number, name and address for them not the IRS.
Hey Petros and John,
Now that you’ve had your morning coffee and your sugar levels are back up to where they ought to be, here’s a little blurb that should warm your hearts and will no doubt convince you and Renounce to take back all those unkind things you’ve had to say about Mr. Shulman and his troops:
Douglas Shulman is my hero. He is so wonderful, I just can’t wait for him to take all my money. It was such a wonderful privilege an American and to have partaken in the most wonderful tax system in the world. I must have been taken over by an evil alien when I renounced my citizenship. I really never wanted stop having the privilege of sending all my forms to the IRS.
Any IBS tweeters want to tweet the Toronto Star’s Moneyville and politely point out that Minister Flaherty knows that for > 1 million Canadians, TFSAs are toxic taxable ‘foreign trusts’ when held by dual Canadian-US citizens and permanent residents, and punishable in the eyes of the IRS – with incomprehensible reporting forms, draconian fines, and a US tax burden. And, that our federal government is entirely aware of this gap in the Canada/US reciprocal tax treaty. Suggest they do a followup pointing out that those 1/32 Canadians claimed by the US, can’t invest or benefit from any of the usual registered accts without IRS reporting.
For non-tweeters, I clicked on “Report An Error” at the top of the article page. You can choose “Factual Error” or “Complaint” and send them a message through their email form.
Income earned in a TFSA is taxable on a current year basis in the U.S.
The Tax Free Savings Account (TFSA) was introduced in Canada to allow qualified individuals (essentially Canadian residents over the age of 18 who have a valid Social Insurance Number) to be able to earn income, tax-free, on cumulative contributions of up to $5,000 per year. Unused TFSA contribution room can be carried forward to future years and withdrawn contributions can be added to future contribution room.
The goal of a TFSA is to encourage Canadians to save on a tax-free basis. The initial amount contributed as well as income earned in the plan is tax free, even when it is withdrawn. However, this is not the case for U.S. taxpayers (U.S. citizens and green card holders) resident in Canada.
A TFSA has no special status under the Internal Revenue Code and there are no relieving provisions contained in the Canada-United States Tax Convention (1980). As such, U.S. taxpayers are taxable on any income earned in a TFSA on a current year basis. This taxable status eliminates the TFSA benefits for most Canadian resident U.S. taxpayers. In some cases, U.S. taxpayers with other investment income may have sufficient Canadian taxes that they will be able to shelter the potential U.S. tax on TFSA income with foreign tax credits.
TFSAs are generally offered as deposits, annuity contracts or trust type arrangements. All of these products create U.S. reporting requirements, in addition to U.S. taxable income.
A TFSA is a foreign financial account for purposes of reporting the account on a U.S. taxpayer’s form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts” (“FBAR”) since the contributor has a direct financial interest in the plan. The FBAR is due June 30th, following the end of the taxation year. There is no ability to extend the due date of this form. Failure to disclose the account can result in significant penalties.
The IRS may consider TFSAs to be foreign trusts. If a U.S. taxpayer is an owner of a non-resident trust, Form 3520-A, “Annual Information Return of Foreign Trust With a U.S. Owner”, is required to be filed 2 ½ months after the trust’s year end. TFSAs originated in 2009 so, by now, the 2009 and 2010 Form 3520-A are past their respective March 15, 2010 and 2011 deadlines.
An automatic extension can be obtained by filing Form 7004, “Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns”, by the original due date. The filing of this form extends the filing date from March 15th to October 15th. These deadlines have also passed for the 2009 and 2010 years.
If a TFSA is considered to be a foreign trust and Form 3520-A is not timely filed, the IRS can assess a penalty equal to the greater of $10,000 (US) or 5% of the gross value of the TFSA at the close of that tax year (the December 31st fair market value). This yields a minimum penalty of $10,000 US per year, double the maximum annual contribution amount.
In addition, Form 3520, “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts” may be required to report contributions and withdrawals from the TFSA. Form 3520 is due at the same time as a taxpayer’s personal tax return, including extensions. Failure to file this form may result in a penalty equal to 35% of the amount of the contribution or of the withdrawal.
To date, there has been no official IRS position on whether these forms are required. There are provisions that allow the IRS to abate the above-noted penalties where there was reasonable cause for the late filing. While it would seem that there is reasonable cause with respect to TFSAs, one can never be sure.
U.S. taxpayers resident in Canada should consider withdrawing their TFSA funds. The withdrawal will not be taxable in Canada or the U.S. and will reinstate TFSA contribution room for future years. If the IRS relieves the taxation of TFSAs in the future, the renewed contribution room can be used efficiently.
That’s a great source @calgary411. I will refer to it again and include the link when I’m contacting people about this.
Particularly struck by the various opinions here:
…”To date, there has been no official IRS position on whether these forms are required. There are provisions that allow the IRS to abate the above-noted penalties where there was reasonable cause for the late filing. While it would seem that there is reasonable cause with respect to TFSAs, one can never be sure.”…http://www.taxspecialistgroup.ca/public/taxtips.asp?n=11-08&site=tsg
If that is true, and no official IRS position has yet been taken, why so many 3520 letters going out – based partly on the TFSAs? Or has there been an official position more recently? I also saw this;
“Wednesday, June 27, 2012 – 09:58PM GMT
Kevyn Nightingale
TFSAs are an interesting question. Some people think they are treated by the US like Roth IRAs are by Canada – under the treaty, the income is never subject to tax. Other practitioners are more conservative – they think that the treaty does not cover TFSAs. At this point, the IRS has issued no guidance, and no court has entertained the question. So there’s no reliable answer.” http://www.mnp.ca/en/media-centre/blog/2012/6/27/new-irs-relief-for-americans-in-canada
and,
this: “NEW Development: 3520/3520A Filings and Penalties:
“We have recently been invited by IRS to present cases in which clients have been subjected to large penalties or other sanctions when filing compliance forms for TFSA and RESP accounts. We have been advised that IRS will take our position before congress to see if the foreign grantor trust rules can be streamlined in the same way that RRSP filings have been simplified.” http://www.serbinski.com/index.shtml
So the IRS takes the position that the TFSA by default is a ‘foreign trust’, and penalizes people who don’t do the 3520 and 3520A, but has yet to take an “official opinion”?
And our Finance Department wants to enter into a FATCA IGA with a government who already punishes us for using Minister Flaherty’s beloved creations – the TFSAs, and RESPs, as well as the RDSPs?
“We have recently been invited by IRS to present cases in which clients have been subjected to large penalties or other sanctions when filing compliance forms for TFSA and RESP accounts. We have been advised that IRS will take our position before congress to see if the foreign grantor trust rules can be streamlined in the same way that RRSP filings have been simplified.” http://www.serbinski.com/index.shtml
How about the sanctions of even having to complete or have a professional complete and file these forms? And, “haven’t they taken an official opinion” – absurd?
Will or can Flaherty insist that these be addressed in the IGA, if that is to be — as well in other countries in their IGAs for such accounts?
@calgary, Flaherty can insist on it now – apart from FATCA. And he’s known all along that while he’s touting the goodness of TFSAs and RESPs, the US IRS is ready to penalize the hell out of all those duals and us persons who took his advice – and now haven’t filed 3520s and 3520As. In fact, now that I think about it, his letter to the press mentioned the CRA not helping to collect on FBARs and taxes, but didn’t say anything about 3520s. He has to know about the scale of the problem – as the Dept of Finance is always crowing about how much of Canada has TFSAs.
“We have recently been invited by IRS to present cases in which clients have been subjected to large penalties or other sanctions when filing compliance forms for TFSA and RESP accounts. We have been advised that IRS will take our position before congress to see if the foreign grantor trust rules can be streamlined in the same way that RRSP filings have been simplified.” ”
from Saturday, October 27, 2012 https://web.archive.org/web/20121028025112/http://www.serbinski.com/index.shtml
Interestingly, that message was gone by the time the page was archived again – Site Updated: Tuesday, January 15, 2013, and replaced with this one;
……”US Citizens Holding RESP and TFSA Accounts
Important Filing Requirements
The IRS consider these plans to be foreign grantor trusts and as such are required to complete two additional forms.
Annual Information Return of Foreign Trusts must be filed by the 15th day of the 3rd month following the end of the trust’s year end.
Penalties, if not timely filed, incomplete or incorrect, start at 5% of the trust value or $10,000 (whichever is greater)
Application of Extension of Time to File must be filed with the IRS by March 15, 2013. Please contact us well in advance to file the necessary extensions for your TFSA and/or RESP accounts.” https://web.archive.org/web/20130115072905/http://serbinski.com/index.shtml
Here it is in 2016 and we still have no simplification and no official IRS position.
So what?
The same rule applies to US citizens with “tax-free” IRA accounts holding foreign securities that pay dividends subject to foreign withholding.
If you cannot get a refund of the withheld tax to the extent it exceeds the allowable treaty rate (if any), the money is lost.
Spain withholds 19% but the treaty rate is only 15%. Anyone here willing to go through the hassle of applying for a refund of the 4% difference?
How much of your remaining lifetime are you willing to spend trying to get the withholding-treaty rate difference back from the exceedingly sticky-fingered French or Italian tax authorities?
The Swiss withhold 35% regardless of the treaty rate but at least they offer a fairly quick – if not simple – refund procedure.
At least the US allows its source withholding to be reduced to the allowable treaty rate – and asks for no greater assurance of treaty eligibility than a signed W-8BEN form.
Bottom line: think before you invest – or badmouth the USA.
@todundsteuer, Yeah, nothing really new here. It’s the same for UK ISAs and SIPPs, approximately equivalent to TFSAs and RRSPs respectively.
http://monevator.com/withholding-tax-on-dividends/
I.e., invest in Canada with your TFSA. That’s why the Canadian government set this thing up.
But what makes me more angry is that the TFSA is taxable in the United States when you do your “voluntary” tax return. I relinquished over this and HEROES (exit tax–get out while the getting is good). I suppose I will be exiled from returning to the US as a tax dodger under the Reed Amendment. Or I will be picked up at the border as a violator of the Bank Secrecy Act. I think I have just cause for saying that the United States has treated me and most other American expats ill. Of course, the persecutor Timothy Geithner apparently received a pardon. And Barack Obama, who was advertising that he was Kenyan-born in 1991, is his boss. So we have an usurper in office, but we are not allowed to bad-mouth the USA. Why? Because drone is going to take us out? One day, if I stop blogging, everyone will know why.
The US tax system is not geared up for refunds like in Europe. Most European tax systems (not France’s it’s pretty complex with 1% deducted for one thing, and .7654% for another, and it doesn’t operate PAYE at all) have some kind of PAYE system where you’re assigned a tax code. The goal is to keep you and the taxman “even” throughout the year so you haven’t grossly “overpaid” tax for that year. For payroll, you are able to get a “tax refund” during any time in the tax year by paying negative tax for that week.
To my best knowledge, the IRS is only geared up for the once a year refund post-April, and collecting quarterly payments from corporations and self-employed individuals.
Refunding money quickly and mid-year would be a departure from IRS’s normal course of business.
Oddly enough refunding withholding tax quickly has never been mentioned by the IRS or how they would even do it. Foreign investors will not wait until April next year for a refund because the IRS can’t adapt its system, this will increase FATCA’s negative effect on the US economy.
I’m sure the fraudsters will figure a way to get phony refunds out of the IRS as well. Between fraud and pi**ed off investors (especially Europeans who expect to get money back quickly) US inward investment probably will drop initially and hopefully never return to teach Levin and others like him a lesson about World 2012 and the US’s new role.
The IRS will struggle as I’ve mentioned before with the following:
– Data Integrity (people using doctored passports etc) to conceal the US as their place of birth to FFIs or even their real identity so the data never reaches the IRS to begin with
– Dual citizens closing down bank accounts in their real name, changing their legal name in Europe and re-opening accounts with their new identities and supplying erroneous W2 information if necessary. When the IRS goes to match it up it will always be an exception, turning it into a full scale manual investigation for the IRS which they won’t be able to go to some database to get a quick answer. If years later the heat gets too much, repeat the process over again. If someone is hard headed enough they’ll exploit the data integrity issue to the max.
– A foreign bank manager who is willing to put down another place of birth for you regardless what your passport says.
– Quick refunds of FATCA withholding tax mid-year wrongly held and refunded months later by the IRS
I very much doubt the IRS is going to be able to rely fully on data from the 175+ countries provided by some guy in a run down old building in the Yemen or even Europe. Hey they could’ve made a mistake on the “place of birth” section on the computer screen. Who’s going to be punished for such a mistake and what are the chances of it being caught once it’s in the system. It’s unlikely governments or FFIs will accept a future US government’s suggestion they should re-check everyone’s identity annually.
Think of this is practical terms, what problem will it really be to the local tax authority or the FFI if you committed a white lie to avoid FATCA and it goes undiscovered for years?
Congress seems to think FATCA is some kind of magical panacea, it isn’t. If you make FATCA a manual difficult unprofitable process with garbage data for the IRS someone someday is going to say at 1111 Constitution Ave this is dumb and it will quietly start playing lip service to Congress that they are actually enforcing it. How is Carl Levin to know either way?
If Levin kicks up what is he going to do about it? Pass another law like the knee-jerk reaction those clowns Schumer and Casey had about Saverin the other day?
The biggest danger is FATCA is going to become the US law foreigners will pay lip service to and don’t really care if the data is correct or not except for what their own government wants. Entering the wrong place of birth will not affect the local government’s ability to collect their own tax. The local government is more interested in correct tax number, name and address for them not the IRS.
Hey Petros and John,
Now that you’ve had your morning coffee and your sugar levels are back up to where they ought to be, here’s a little blurb that should warm your hearts and will no doubt convince you and Renounce to take back all those unkind things you’ve had to say about Mr. Shulman and his troops:
http://www.accountingtoday.com/taxprotoday/news/IRS-AICPA-Commissioner-Douglas-Shulman-Tax-Code62676-1.html?ET=webcpa:e2525:295868a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=tpt_052212&taxpro
Douglas Shulman is my hero. He is so wonderful, I just can’t wait for him to take all my money. It was such a wonderful privilege an American and to have partaken in the most wonderful tax system in the world. I must have been taken over by an evil alien when I renounced my citizenship. I really never wanted stop having the privilege of sending all my forms to the IRS.
Any IBS tweeters want to tweet the Toronto Star’s Moneyville and politely point out that Minister Flaherty knows that for > 1 million Canadians, TFSAs are toxic taxable ‘foreign trusts’ when held by dual Canadian-US citizens and permanent residents, and punishable in the eyes of the IRS – with incomprehensible reporting forms, draconian fines, and a US tax burden. And, that our federal government is entirely aware of this gap in the Canada/US reciprocal tax treaty. Suggest they do a followup pointing out that those 1/32 Canadians claimed by the US, can’t invest or benefit from any of the usual registered accts without IRS reporting.
http://www.moneyville.ca/article/1294491–tax-free-savings-accounts-10-things-you-need-to-know
For non-tweeters, I clicked on “Report An Error” at the top of the article page. You can choose “Factual Error” or “Complaint” and send them a message through their email form.
http://www.taxspecialistgroup.ca/public/taxtips.asp?n=11-08&site=tsg
That’s a great source @calgary411. I will refer to it again and include the link when I’m contacting people about this.
Particularly struck by the various opinions here:
…”To date, there has been no official IRS position on whether these forms are required. There are provisions that allow the IRS to abate the above-noted penalties where there was reasonable cause for the late filing. While it would seem that there is reasonable cause with respect to TFSAs, one can never be sure.”… http://www.taxspecialistgroup.ca/public/taxtips.asp?n=11-08&site=tsg
If that is true, and no official IRS position has yet been taken, why so many 3520 letters going out – based partly on the TFSAs? Or has there been an official position more recently? I also saw this;
“Wednesday, June 27, 2012 – 09:58PM GMT
Kevyn Nightingale
TFSAs are an interesting question. Some people think they are treated by the US like Roth IRAs are by Canada – under the treaty, the income is never subject to tax. Other practitioners are more conservative – they think that the treaty does not cover TFSAs. At this point, the IRS has issued no guidance, and no court has entertained the question. So there’s no reliable answer.” http://www.mnp.ca/en/media-centre/blog/2012/6/27/new-irs-relief-for-americans-in-canada
and,
this: “NEW Development: 3520/3520A Filings and Penalties:
“We have recently been invited by IRS to present cases in which clients have been subjected to large penalties or other sanctions when filing compliance forms for TFSA and RESP accounts. We have been advised that IRS will take our position before congress to see if the foreign grantor trust rules can be streamlined in the same way that RRSP filings have been simplified.” http://www.serbinski.com/index.shtml
So the IRS takes the position that the TFSA by default is a ‘foreign trust’, and penalizes people who don’t do the 3520 and 3520A, but has yet to take an “official opinion”?
And our Finance Department wants to enter into a FATCA IGA with a government who already punishes us for using Minister Flaherty’s beloved creations – the TFSAs, and RESPs, as well as the RDSPs?
“We have recently been invited by IRS to present cases in which clients have been subjected to large penalties or other sanctions when filing compliance forms for TFSA and RESP accounts. We have been advised that IRS will take our position before congress to see if the foreign grantor trust rules can be streamlined in the same way that RRSP filings have been simplified.” http://www.serbinski.com/index.shtml
How about the sanctions of even having to complete or have a professional complete and file these forms? And, “haven’t they taken an official opinion” – absurd?
Will or can Flaherty insist that these be addressed in the IGA, if that is to be — as well in other countries in their IGAs for such accounts?
@calgary, Flaherty can insist on it now – apart from FATCA. And he’s known all along that while he’s touting the goodness of TFSAs and RESPs, the US IRS is ready to penalize the hell out of all those duals and us persons who took his advice – and now haven’t filed 3520s and 3520As. In fact, now that I think about it, his letter to the press mentioned the CRA not helping to collect on FBARs and taxes, but didn’t say anything about 3520s. He has to know about the scale of the problem – as the Dept of Finance is always crowing about how much of Canada has TFSAs.
Another point of view re the TFSA and “foreign trust” issue.
http://hodgen.com/canadian-tfsas-and-the-certification-test/
I’m looking backwards at my http://isaacbrocksociety.ca/2012/05/22/guess-when-a-canadian-tfsa-is-not-really-tax-exempt/comment-page-1/#comment-104603 post about a notice I saw on the Serbinski site;
““NEW Development: 3520/3520A Filings and Penalties:
“We have recently been invited by IRS to present cases in which clients have been subjected to large penalties or other sanctions when filing compliance forms for TFSA and RESP accounts. We have been advised that IRS will take our position before congress to see if the foreign grantor trust rules can be streamlined in the same way that RRSP filings have been simplified.” ”
from Saturday, October 27, 2012
https://web.archive.org/web/20121028025112/http://www.serbinski.com/index.shtml
Interestingly, that message was gone by the time the page was archived again – Site Updated: Tuesday, January 15, 2013, and replaced with this one;
……”US Citizens Holding RESP and TFSA Accounts
Important Filing Requirements
The IRS consider these plans to be foreign grantor trusts and as such are required to complete two additional forms.
Annual Information Return of Foreign Trusts must be filed by the 15th day of the 3rd month following the end of the trust’s year end.
Penalties, if not timely filed, incomplete or incorrect, start at 5% of the trust value or $10,000 (whichever is greater)
Application of Extension of Time to File must be filed with the IRS by March 15, 2013. Please contact us well in advance to file the necessary extensions for your TFSA and/or RESP accounts.”
https://web.archive.org/web/20130115072905/http://serbinski.com/index.shtml
Here it is in 2016 and we still have no simplification and no official IRS position.
I used the Wayback Machine and compared the archive page over time.
https://web.archive.org/web/20130101000000*/http://www.serbinski.com/index.shtml