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 firstname.lastname@example.org.
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…
Tom 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?