When Brock started, one of the major issues was that we questioned what we were being told; not just by the U.S. government but specifically, by the tax lawyers and accountants. It became painfully clear that many simply did not know what they were saying; some did not have direct cross-border experience and others simply repeated what their colleagues were saying. Sometimes they could not quite believe we would question their judgement or not be scared into believing what they said. Some of the concepts were fairly mundane while others, such as 877A being retroactive, were overwhelming. The story about PFICs is unbelievable and the application of interest etc, goes back to 1986.
When I first saw this, I thought of making a post just from Tom Paine’s longest answer. After thinking about it, I decided it would have more impact if seen in the context it was offered.I find it quite telling that after the initial question was asked, this person offers themself as an expert and seems to assume being a CPA/CA is ample proof of that. Tom Paine’s first comment clearly indicates he knows what he is talking about. Notice how the compliance person does not pick this up right away. And the contrast between: “The IRS considers TFSA’s ….” to “The IRS hasn’t given any gudiance…” But then THIS… “TFSA’s have that “wary” factor (i.e., “the IRS doesn’t say so but you better be sure and do it this way”). When that isn’t enough, relies upon Phil’s post. If this person was a specialist and really understood what a foreign trust was, wouldn’t one expect some clear explanation to indicate it? Would you be willing to pay this person $500 for a 3520A and another $500 for a 3520 ($500 being a standard starting fee for extra forms…). After Tom Paine’s last statement, there were no further comments from the CPA/CA.
A conversation on Facebook about TFSA’s
Q. Need some help please. I have an account with a company called PI Financial in Vancouver. It is not a traditional walk in bank but a financial institution that manages money. I have one Tax Free Savings Account with them that I bought stock with from one Canadian company. Besides the initial deposit of money and the purchasing of stock from one company, there has been no transaction, gains, or interest on my account. It simply holds stock.
How do I handle this on my USA taxes? My accountant at H and R block says he needs to read my terms of conditions with PI Financial as he is unsure what forms I need to do for it. He mentioned something about possibly being a “foreign trust” and if it is he may need to send a form to two different offices in the states, ect, ect. It was alarming that he seemed unsure.
Any guidance on what additional forms I need to file on top of the 1040 for a financial account (Tax Free Savings Account) that holds stock from one Canadian company?*****
L. Hi Phil,
I am a California CPA and Canadian CA. I specialize in cross border taxes. I can go over this with you. Can you email me at xxxxxxx@gmail.com.Tom Paine Unlikely it would meet the definition of a trust under U.S. law. If not, then it’s not a trust. If it’s not a trust, it’s not a foreign trust.
L. A TFSA (tax free savings account) is the equivalent of a Roth IRA for Canadians. The IRS considers TFSA’s to be trusts.
Tom Paine Is that written in one of their publications or on their site somewhere?
L. Actually, I misspoke the IRS hasn’t given any guidance on TFSA’s so a protective response is to treat them like trusts. TFSA’s have that “wary” factor….
Tom Paine Yes, but the problem becomes if one files the 3520, how does one stop filing it? Here is a link to an IRS definition of a trust (and there may be others). It says: “In general, a trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another.” This is not what a TFSA really is. It’s just a place to store money to get a tax free gain. The bank is no way required to do anything for the benefit of the owner of the TFSA.
L. This might be helpful:
Canadian TFSAs and the Certification Test
Hi, it’s Phil again and we’re talking about Expatriation again. Every other Tuesday, it’s…
HODGEN.COMTom Paine This article focuses primarily on the fact that the income inside the TFSA is income from a U.S. perspective. It also notes that if the TFSA holds mutual funds then it would be PFIC income. What the article also makes clear (see the discussion of the Mexico situation, etc.) is this: The fact that the word “trust” is in the description in Canada or Mexico does NOT make it a “trust” for U.S tax purposes. The article quotes this relevant part of the Treasury regulations: “the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility”. Note the words “cannot share in the discharge”. The words “cannot share in the discharge” suggest that the taxpayer would lose all control over the investment decisions. It is very difficult to see how UNDER U.S. RULES a TFSA is a foreign trust. Let me say why I cam continuing this discussion. The simple and dirty truth about U.S. tax compliance for Americans abroad is that the tax preparers create the law. Once a critical mass of tax preparers starts to take a specific position it becomes (in effect) the law because that is what the IRS expects to see. Once the IRS expects to see a Form 3520 (whether required or not) it becomes riskier to not file one. This is NOT because the law requires it, but because the IRS is used to seeing it. The best advice for those second class Canadian citizens – AKA “US Property” – (A Canadian is a Canadian NOT) is to avoid the problem altogether by not using TFSAs and renounce U.S. citizenship at the earliest possible moment. Those who do have TFSAs should sell them. Those who have them and have not been filing 3520s should NOT start. Those who want to file the 3520 because there is a chance that somebody in the IRS might consider the TFSA to be a foreign trust MUST also file Form 3520A (which needs to be filed by March 15 – before the due date of the 1040). It’s not just one form. It’s two.
My personal favourite is an exchange I had with a lawyer who represented the immigration side of a tax firm. He had made a statement that “a CLN was and had always been a requirement.” I said that I was relatively sure that was not the case. He then said he thought it was “one of those things that had always been the law but had never been enforced.” A clear mis-linking to the Reed Amendment. It horrifies me to know the charge to expats who go with this “expert.” (I then went back and read the INA from 1940 onwards and nowhere does it say a CLN is required; it merely says if the consulate knows a person has taken an action and lost U.S. citizenship, they should mail one if they know where to send it). As much as we have challenged these sorts of things since we began, I wonder how many we still simply accept and are possibly not true?
‘Phil’ asked the very same question on May 17 on the lead thread on IBS.
I advised him to read what Max Reed had to say about TFSAs. ( He doesn’t believe them to be trusts as defined by the IRS- he agrees the IRS has given no guidance.
I’m always suspicious of those who ask for advice and are never heard from again.
How could the IRS ever guide people about trust? It’s not as though they had any.
@Duke
This is Phil’s same question posted a day before it appeared here at Brock. I know Phil; he has posted other comments here at Brock. Perhaps you have not seen some of them.
He is not someone to have suspicions about. Though I know what you mean; I am sure such posing goes on…….
Even after the signing of the Hire Act 6 years ago, the vast major of the tax compliance industry doesn’t understand FATCA and its impact. That’s why they’re an unreliable source of information.
TFSA’s have a “wary” factor because they could be set up as trusts.
The person did not write that treating the TFSA as a trust was the only approach.
A cross border tax preparer or US lawyer will never tell you the following:
“What the IRS can’t know unless you tell them cannot hurt you.”
Go ahead and invest in the TFSA. Just do not tell the IRS. TFSAs are protected under the IGA. What are we afraid of?
I know of one couple in particular who was was told by their bank to consult with a tax expert of the bank’s recommendation. Fortunately, the couple had the presence of mind to first talk to someone who determined that they in fact had relinquished US citizenship decades earlier.
Banks and tax experts will not recommend the suspected US person bank customer provide a “reasonable explanation” as to why they should not be considered a USperson, but instead prefer to railroad people back into the US tax system. The CRA offers no guidance to banks as to what constitutes a “reasonable explanation”, therefore will have blood on its hands when this happens.
@Petros
The Canadian government now needs to live up to the standard it’s created for itself by its ‘heroic’ efforts to exempt TFSA’s, etc by having them properly dealt within the treaty between Canada and the US. Otherwise, how can it justify that the IGA is allowed under the currently treaty when the treaty doesn’t prevent the double taxation of these investments?
https://www.cpacanada.ca/en/connecting-and-news/news/media-centre/2016/march/us-canada-tax-assisted-savings
@Bubblebustin
TFSA’s are not taxed in Canada – so double taxation doesn’t apply.
Yep, with the exception of the RRSP (and its derivative, the RRIF), the IRS is happy to tax whatever Canada does not and the Canadian government is happy to let them do it. The fact that Canadian registered accounts are not reported under the IGA is nothing but a load of feel good crap served up by the former Conservative government which “negotiated” this pathetic so-called agreement. They weren’t heroes; they were cowards. The Liberals are proving to be just as cowardly on this file. A pox on all their houses.
I stand corrected on TFSA’s then (never having bought any for obvious reasons that they are included as income for US tax purposes):
“…the Treaty does not provide any relief from double taxation or current inclusion in income for other plans and accounts such as:
* Education savings plans such as Registered Education Savings Plans (RESP) in Canada and Qualified Tuition Program (529) Plans in the United States.
* Disability savings plans such as Registered Disability Savings Plans (RDSP) in Canada and Qualified ABLE Plans in the United States.
* Generally tax-exempt savings accounts such as Tax Free Savings Accounts (TFSA) in Canada and Roth IRAs in the United States (under certain circumstances).”
https://www.cpacanada.ca/~/media/site/operational/mr-media-releases/docs/feb%2025%202016letter%20to%20finance%20canadauscanada%20tax%20deferred%20planssigned.pdf
Why the F does AmCham and Canadian COA’s need to lobby the Canadian government to exempt these savings? Don’t they already see that the treaty is a failure? The fact that they had to exempt these accounts from FATCA reporting is proof of that. The treaty is there to prevent double taxation, no? If they’re going to have a treaty, Canada should examine the tax ramifications these investment vehicles have on all Canadians BEFORE they are introduced – rather than after the damage has been done.
Fact is, with everyone asleep at the wheel, this has been an accident waiting to happen.
…and who is responsible for a general warning when these investments (RESP, RDSP, TFSA) are sold to Canadians that if you might be deemed to be a US Person, you are not advised to purchase?
Is there a warning on the CRA site?
Does each salesperson and journalist who pitches holding them even know the danger to those purchasers who will be harmed but are still encouraged each tax season of their value of investment for Canadians’ futures?
Is the reason they are exempt because there has never been any warning on these investment vehicles?
Should every Canadian be able to purchase such investments for their or their families’ futures?
Is every Canadian a Canadian?
Its entrapment, plain and simple as these investments (as I believe Badger pointed out) must one day go into a reportable account.
Excellent post, Tricia.
The concept that tax preparers are essentially re-writing the law through their conservative treatment is mind boggling.
@calgary411 said
This is a huge problem everywhere – not only with locally tax exempt accounts (including retirement accounts not protected by treaty), but also with PFICs. Who is there to warn the US-tainted investor of the US tax consequences of normal financial advice in your home country? My opinion is that any Australian financial planner who detects the possibility of US-taint is guilty of malpractice if they don’t at least raise the issue of the US tax effects of their advice.
I think it needs to be a general warning, without the requirement of any possible identification of US Persons. I have asked that for a long time but have never seen some simple warning in any articles or advertisements for the sale of these investments.
WARNING: If you have any connection to the US, somehow deemed a US Citizen or US Person, you are second-class and this is not an investment that would be safe for you.
That would wake up those both US and those other first-class citizens of countries outsides the US borders.
While we are at it, we need to create, in Canadian law, a warning about the effects on a person when marrying a “US tainted” person in Canada. The WARNINGS should be loud and clear.
@ NativeCanadian
You bet. We are toxic spouses and partners. Just ask mine. He rightly resents this intrusion into his privacy and banking info. This should be in big bold font on any marriage certificate currently being issued across Canada. As an aside, and as a lawyer, I can see this as bona fide grounds for an annulment.
I have taken steps to protect my husband but I can’t do everything. And I never should have had to do anything. It is a horrible burden of guilt the damn USG and Can government has imposed on me.
I have witnessed the strain this has placed on marriages and partnerships. Yet wasn’t it Trudeau1 who said the nation has no business in the bedrooms of its people? I should hit the sack as I have to take tomorrow off to celebrate Trudeau2’s wedding anniversary with him. As you can imagine, I really want to be fully awake tomorrow to do just that.
NativeCanadian,
In March 2014 John Richardson and I made this recommendation (among others) to Canada Finance.
Some felt that our recommendation was way too “strong” and provocative, but I don’t agree and feel that these people just lack understanding. Here’s what we said:
“6) Because the enforcement of “U.S. taxation” against “U.S. persons” resident in Canada makes them unable to save and invest for retirement, we recommend that: Those “U.S. persons” in Canada, who wish to marry “non-U.S. persons” be required, for the protection of their future spouse, to disclose their “U.S. personhood” to that spouse, and be required to obtain a marriage license from the Government of Canada, the issuance of which is conditional on proof of that disclosure.”
Parliament should mandate a property of USA bum tatoo test. Sort of like Donald Trump’s STD test before he bedded a new girlfriend.
http://www.dailymail.co.uk/news/article-3451452/Trump-says-sex-eighties-personal-Vietnam-Howard-Stern-interview-1997.html#ixzz49fd6jUYc
Everyone in the world will have to get an STD test from Trump’s personal doctor because President Trump is going to fuck the entire world.
Furthermore since US Eritrean-style taxation is going to remain, the US’s diaspora will continue getting formfucked too, so US persons outside of the US will have to get TWO STD tests from Trump’s personal doctor.
I guess Obamacare won’t pay for it, but will an expansion of Romneycare pay for it when Romney teaches Trump how good a job Romney did as governor?
I was advised by several US accountants and tax lawyers that I could gift assets and expatriate all within the same year. Then in the following year hand in the last return together with FBAR and 709 and claim the unified tax credit on the gifts from the previous year.
I have done exactly so and now I’m in a disastrous position and don’t know what to do.
The tax code is written so ambiguously in places that even tax gurus like Phil were left guessing [ blog dec 2015]
Is there anybody else in the community who is in the same position as I am?
Is there anyone who got caught out? As every body was left guessing up until Phills blog Dec 2016 am I the only one who fell into this trap???
@Robert1
I am not sure that I understand the problem you are having.
I understood that form 709 covered the whole taxable year in which the gift was given, I see no question on the form asking your status on Dec 31st.
Are you now being told by your accountant/attorney otherwise?
To the best of my knowledge others here have expatriated, gifted and filed in the same year and had no problems with this.
The choice is yours to file or not.
Robert!
PS
I just took a look at the wording of …Section 2505(a)
‘allows a citizen or resident of the United States a credit against the tax imposed by section 2501 for each calendar year. The allowable credit is the applicable credit amount in effect under Section 2505(a) allows a citizen or resident of the United States a credit against the tax imposed by section 2501 for each calendar year. The allowable credit is the applicable credit amount in effect under section 2010(c) that would apply if the donor died as of the end of the calendar year, reduced by the sum of the amounts allowable as a credit against the gift tax due for all preceding calendar periods. See §§25.2505-2, 20.2010-1, and 20.2010-2 for additional rules and definitions related to determining the applicable credit amount in effect under section 2010(c).. See §§25.2505-2, 20.2010-1, and 20.2010-2 for additional rules and definitions related to determining the applicable credit amount in effect under section 2010(c).’
(section 2010(c) that would apply if the donor died ‘as of the end of the calendar year,’ )
What does AS OF the end mean’?
Definition of (as of.) Websters dictionary —”used to indicate a time or date at which something begins or ends ”
So it could very well mark the end of the yearly period in which the gift can be given.
I think Phil is being cautious in his interpretation of ‘as of’
There is nothing on form 709 that alludes to this. Every reference points towards determining your citizenship when you gave or received the gift.