U.S. Tax on TFSA and RESP

Tax-Free Savings Account (TFSA)

• The Tax-Free Savings Account (TFSA) allows Canadians, age 18 and over, to set money aside tax-free throughout their lifetime
• All income earned and withdrawals from a TFSA are tax-free
• Check our notes on TFSA under the Canadian section for more details – Click here

The U.S. taxation system, however, does not allow tax-free benefits for TFSA and as such it is subject to taxation for U.S. Citizens and Resident Aliens. The income earned in TFSA is taxed on annual basis even if it is not withdrawn.

In addition, TFSA requires following compliance:

• Form 3520 and 3520-A as IRS view TFSA as a foreign trust. The key thing is that TFSA is structured as a trust arrangement. 
• Form 8938 if the total value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year.
• FBAR (FinCEN 114)

Registered Education Savings Plan (RESP)

• The subscriber of an RESP plan makes contributions for a beneficiary (usually their children or grand-children) to help save for post-secondary education.
• RESP’s generate interest income and grants which are taxed in the hands of the beneficiaries (the children)
• Check our notes on RESP under the Canadian section for more details – Click here

The IRS treats RESP the same way as TFSAs. The IRS will tax the income generated (excluding unrealized capital gains) in the RESP and government grants in the hand of the contributor. One way to avoid this issue is to have the non-U.S. citizen spouse or non-U.S. citizen grandparents be the contributor for the RESP. The contributor is required to file 3520 and 3520A. 

 Where beneficiary (child) is a U.S. Citizen or resident, he or she is required to file form 3520 as well in any year they receive a distribution from an RESP. They will need to pay tax as well.