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TAX TREATMENT OF TFSAS FOR DUAL U.S./CANADA CITIZENS
11/24/2017 9:52:30 AM
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Wealth Builder
Gordon Pape writes on common-sense wealth-building strategies.



By Gordon Pape  | Tuesday, May 02, 2017


Q – My husband has dual citizenship with Canada and the U.S. Because of that, we have topped up my TFSA and now have money to contribute to his. To keep things simple for U.S. income tax filing purposes, does it make sense to buy Canadian stocks in U.S. dollars in the plan? The intent is to withdraw profits yearly to fund our southern winter vacation every year and after the initial purchase not have to worry about the exchange rates. I would appreciate any ideas that you have. – D.M.

A – I assume you are aware that the U.S. does not recognize TFSAs under the Canada-U.S. Tax Treaty. Therefore, all investment income (dividends, interest, and capital gains) earned in the plan must be reported annually by your husband when he files his U.S. tax return. And some or all of that income may be taxable.

However, it’s not as simple as just filing the basic IRS Form 1040. The U.S. Internal Revenue Service (IRS) deems a TFSA to be a trust. As such, it requires that you file one form for reporting income and transactions, and another annual information form. Things get even more complicated if your husband holds a Canadian mutual fund in the TFSA, because the Canadian fund is deemed a “passive foreign investment” with income tax calculated by a complicated formula.

The bottom line is that because all U.S. tax returns have to be filed in U.S. dollars, it would make sense to have the assets in the TFSA held in U.S. dollar-denominated securities, and to avoid Canadian mutual funds if possible. In this case, you may need tax-preparation help from an accountant or tax lawyer specializing in Canada/U.S. tax issues.

If you have a financial question, click through to the question form on my website. Mention that it’s a “Fund Library” question. Sorry, but I cannot guarantee personal answers, although I try my best. – Gordon Pape

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investornewsletter, which are available through the Building Wealth website.

Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.

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© 2017 by The Fund Library. All rights reserved.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

 
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