I am moving to the USA from Canada. What should I do with my TFSA?

For new American residents, TFSAs can be tricky. But if you haven’t moved there yet, don’t panic! Just plan ahead. If you have already moved, keep reading, and reach out to us to help you get things settled.

Let us help you with 5 steps you will need to take to ensure a smooth transition to the USA with your TFSA in tow.

Step 1: You don’t need to close your TFSA when you move to the U.S.

Great news! You can keep your TFSA open in Canada while you are living in the U.S. But it’s not as easy as just “leaving it alone” to grow.

There are several things that you need to be aware of as you make a decision about your TFSA. Carefully review the steps in this article and consider contacting us at Huston Wealth Management to discuss your options.

Step 2: Quickly get to know the U.S. tax rules for a U.S. resident who holds a TFSA.

• Your TFSA isn’t Tax-free anymore: The IRS (Internal Revenue Service - The U.S. version of the CRA) doesn’t view your TFSA as “tax-free” like Canada does. That means that any U.S. resident must pay income taxes every year on all income and capital gains earned in your TFSA.

• Your TFSA isn’t a “TFSA” in the U.S.: The IRS views your TFSA under the umbrella term of “foreign trust.” That means that when you file your U.S. tax return, you will be required to fill out two additional forms (Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts and Form 3520A Annual Information Return of Foreign Trust with a U.S. Owner). Bear in mind that your tax professional will likely charge extra to complete these forms.
• You may need to report your TFSA twice: If the total of all your non-U.S. accounts is greater than $10,000 at any time during the year, the IRS requires you to report all your foreign accounts. This reporting is completed by filing a “Report of Foreign Bank and Financial Accounts (FBAR – Form 114 – See here for IRS FBAR page). This form would need to be completed along with the forms in point 2.

(Source for “Step 2” - https://www.advisor.ca/tax/tax-strategies/avoid-cross-border-pitfalls-with-tfsas/)

Step 3: Don’t make contributions to your TFSA after you have moved to the USA.

Once you move to U.S., you will no longer be able to make contributions to your TFSA. And the penalties for doing so are quite heavy.

The CRA will tax you 1% of your contribution every month that the contribution remains in your TFSA account. That means, if you are already living in the U.S., and have been making contributions, you should remove them as quickly as possible (https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466/tax-free-savings-account-tfsa-guide-individuals.html).

Step 4: Don’t try to transfer your TFSA into a similar (but not equivalent) Roth IRA found in the U.S.

As we mentioned in step 2, U.S.’s Internal Revenue Service does not view your TFSA as “tax-free,” but rather as a “foreign trust.” You may have heard that the U.S. has a tax vehicle that is similar to a TFSA, called a ROTH IRA. Though the ROTH has similarities to the TFSA, it is important to know that neither the TFSA nor the Roth IRA are recognized in the USA-Canada Tax treaty as reciprocal accounts.

The USA-Canada Tax Treaty does not allow for rollovers/transfers of TFSAs to ROTHs, or vice versa. Any attempt to complete this type of transaction would merely be creating a full distribution from your TFSA and an “over-the-limit” contribution into your Roth IRA.

One other note: If you might move back to Canada in the future and are considering opening a ROTH IRA now that you are living in the U.S., consider reading our article on Roth IRAs for Canadian residents here https://www.hustonwealthmanagement.com/cross-border-services/what-should-i-do-with-my-roth-ira.

So, if you’re looking to open a retirement account in the U.S., you may want to speak with us about a Traditional IRA.

Step 5: Consider consolidating your Canadian and U.S. accounts with one Cross-Border Financial Advisor.

Sometimes our financial lives are too complicated to keep thinking about them. But the worst move you can make is to do nothing. That could spell H-E-A-V-Y tax consequences down the road. We know all of this takes time and planning. Time you probably don’t have since you’re planning a move!

That’s where a dual-licensed USA-Canada, cross-border financial advisor comes in. By working with Raymond James USA, you can hold your U.S. retirement accounts and your Canadian retirement accounts with one advisor.

So, let us do some of the legwork for you and allow our tax professionals to offer some guidance. We’ll work behind the scenes while you work on getting settled in the USA.

Disclosure: The information above is from sources believed to be reliable, however, we cannot represent that it is accurate or complete and it should not be considered personal tax advice. We are not tax advisors and clients must seek independent advice from a competent professional advisor on tax-related matters before withdrawing from their U.S. retirement plan.

Disclosure: This material has been prepared by Dean Huston and expresses the opinions of the authors and not necessarily those of Raymond James Ltd. (RJL). Statistics, factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This newsletter is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a Member-Canadian Investor Protection Fund.

Raymond James (USA) Ltd. advisors may only conduct business with residents of the states and/or jurisdictions in which they are properly registered. Raymond James (USA) Ltd. is a member of FINRA/SIPC.