How does the IRS treat RRSPs, TFSAs and other registered plans?

Does Canada's tax break carry over to the US return?

Only where the treaty or US tax rules say so. US citizens and residents are taxed on worldwide income, and an account's registered status in Canada does not change that. Two things can:

• Treaty deferral. Article XVIII(7) of the Canada–US tax treaty lets a US citizen or resident defer US tax on income in a Canadian plan that is generally tax-exempt in Canada and operated exclusively to provide pension or employee benefits. Rev. Proc. 2014-55 sets the rules, and RRSPs and RRIFs qualify.
• Reporting relief. Rev. Proc. 2020-17 removes Forms 3520 and 3520-A for some foreign retirement, medical, disability and education trusts. It changes reporting, not tax.

No binding IRS guidance says how the TFSA, FHSA, RESP or RDSP is taxed. The IRS FBAR guide lists the TFSA as a reportable account, and a non-binding IRS Chief Counsel letter says the treaty does not defer US tax on RESP income. The Canada–US FATCA agreement and a later IRS–CRA arrangement exclude RRSPs, RRIFs, TFSAs, FHSAs, RESPs and RDSPs from the accounts Canadian financial institutions must report for the IRS. That changes neither US tax nor your own FBAR and Form 8938 filing.

How is each account treated?

Only RRSPs and RRIFs have settled US treatment. The rest turn on questions the IRS has not answered in binding guidance.

How are RRSPs and RRIFs taxed on the US return?

Income inside is not taxed until you withdraw it, if you are an eligible individual. Rev. Proc. 2014-55 treats you as having made the treaty election automatically. No form or statement is needed, and Form 8891 is obsolete.

You are an eligible individual for a plan if you:

1. are or were a US citizen or resident while a beneficiary of the plan;
2. have met every US return filing requirement for the years you were a US citizen or resident;
3. have never reported the plan's undistributed income on a US return; and
4. have reported every withdrawal as if the election were in effect.

If you ever reported the plan's undistributed income, you keep reporting it yearly unless the IRS consents to the election. The election works plan by plan, and applies whether or not you lived in Canada when you contributed.

Are RRSP contributions deductible on the US return?

Generally not. An RRSP is not an IRA, which must be a trust created in the US (26 U.S.C. 408(a)). The treaty allows a US deduction only in certain employment cases (Article XVIII(8) to (15)): a US citizen or resident employed in Canada by a Canadian employer, or a worker posted to the US for a limited time who stays in a Canadian plan. The plan must be a qualifying plan with employer involvement, and relief is capped, generally at what a similar US plan would allow. A personal RRSP your employer has no part in does not qualify.

How are RRSP and RRIF withdrawals taxed?

Withdrawals are taxable on the US return, subject to the treaty (Rev. Proc. 2014-55, section 6). The taxable part depends on your US basis in the plan, roughly the amounts the US has already taxed, which depends on your history; the revenue procedure's own example treats each withdrawal as fully taxable. Canadian tax on the withdrawal can generally be claimed as a foreign tax credit on Form 1116, within the credit's limits.

Home Buyers' Plan and Lifelong Learning Plan withdrawals are not taxed in Canada (CRA). Rev. Proc. 2014-55 makes no exception for them, so they can be taxable on the US return with no Canadian tax to credit.

The extra US tax on early withdrawals (section 72(t)) applies only to the US plans listed in section 4974(c), such as IRAs and 401(k) plans, so on its terms it does not reach an RRSP or RRIF.

What must still be reported?

No Form 3520 or 3520-A (Form 3520 instructions, Exceptions To Filing). The plan still counts toward the FBAR and Form 8938: the IRS FBAR guide names the RRSP as a reportable account, and Rev. Proc. 2014-55 leaves both requirements in place.

How is a TFSA taxed on the US return?

Income inside a TFSA is taxable on the US return as it is earned. Canada generally does not tax it, but no treaty article or IRS guidance defers US tax on it. Article XVIII(7) covers only plans operated exclusively for pension or employee benefits, and a TFSA lets you withdraw at any time.

• Interest and dividends earned inside the account, and gains when investments are sold, are generally reported on the US return for that year.
• There is usually no Canadian tax on that income to credit against the US tax.
• Contributions are not deductible in Canada or the US.
• Funds held inside may be PFICs (see below).

Is a TFSA a foreign trust?

Unsettled. A TFSA can be a deposit, an annuity contract or an arrangement in trust (CRA). If a TFSA is a foreign trust you are treated as owning, you file Form 3520 each year and the trust must file Form 3520-A, or you attach a substitute (Form 3520 instructions).

The IRS has not said whether a TFSA is a trust for US purposes. It does not appear to fit Rev. Proc. 2020-17: it is not built for retirement, medical, disability or education, and withdrawals are not restricted.

The penalty for a missing Form 3520-A is generally the greater of US$10,000 or 5% of the trust assets you are treated as owning. An unreported contribution to the trust can carry the greater of US$10,000 or 35% of the amount contributed. No penalty applies if the failure was due to reasonable cause and not willful neglect.

How is an FHSA treated?

Unsettled: no IRS guidance says how an FHSA is taxed. What is known:

• In Canada, contributions are generally deductible and qualifying withdrawals to buy a first home are tax-free (CRA). The Canadian deduction does not carry over to the US return.
• It is not operated exclusively for pension or employee benefits, so Article XVIII(7) does not reach it on its terms. Without deferral, the general rule taxes income as it is earned.
• Like a TFSA, it can be an arrangement in trust, an annuity contract or a deposit (Income Tax Act, section 146.6). The same foreign-trust question arises, and buying a home is not a purpose Rev. Proc. 2020-17 covers.

How are RESPs and RDSPs treated?

Partly unsettled. Neither is a pension plan, so the treaty deferral does not apply, and a non-binding IRS Chief Counsel letter says so for RESPs. No IRS guidance answers the open questions: whether the plan is a foreign trust, and whether its income is taxed each year to the person who funds it or later to the beneficiary. That turns on how the plan is classified under the US trust rules.

• RESP: a contract between a subscriber and a promoter. Contributions are not deductible, income is not taxed in Canada while it stays in the plan, and educational assistance payments are taxed to the student (CRA).
• RDSP: savings for a person approved for the disability tax credit. Contributions are not deductible; grants, bonds and investment income are taxed to the beneficiary when paid out (CRA).

Does Rev. Proc. 2020-17 remove Forms 3520 and 3520-A?

It may. Rev. Proc. 2020-17 exempts eligible individuals from both forms for a foreign trust built for medical, disability or educational benefits if, under its country's laws:

• it is tax-exempt or tax-favored;
• annual information on it goes to the local tax authority;
• contributions are capped at US$10,000 a year or US$200,000 over its life, in US dollars at the Treasury year-end rate; and
• withdrawals are limited to those benefits, or penalized otherwise.

An eligible individual has filed, or catches up on, every required US return for the years the IRS can still assess tax, and has reported any income from the trust that US law requires.

RESPs and RDSPs are built for education and disability, but the IRS has not said whether they meet every condition. For example, an RESP lets the subscriber take contributions back without Canadian tax, which may not meet the withdrawal condition.

What would the proposed foreign trust regulations change?

Probably little for Canadian accounts. The rules are only proposed, and they do not clearly exempt a TFSA or FHSA. Proposed regulations under section 6048 would restate the Rev. Proc. 2020-17 exemptions with updated limits and define a category for small savings trusts whose combined value in one country stays at or under US$50,000.

They are not final. The Form 3520 instructions let you rely on them if you and related persons apply them in full and consistently. Their preamble says small savings trusts would be exempt, but the exemption text itself, and the Form 3520 instructions, name only the retirement, medical, disability and education categories, so whether a small TFSA or FHSA would be exempt is unclear even under the proposal.

Do funds inside these accounts need Form 8621?

They can. A foreign corporation is a passive foreign investment company (PFIC) if it meets a passive income or passive asset test (Form 8621 instructions). A Canadian mutual fund or ETF that is a corporation for US purposes can be one, and each PFIC generally needs its own Form 8621.

• RRSP and RRIF: no Form 8621 for funds held inside, while the treaty deferral applies. The exception covers an arrangement treated as a pension fund under a treaty, if the treaty taxes its income only when paid out (26 CFR 1.1298-1(c)(4)). That is what the Article XVIII(7) deferral does.
• TFSA, FHSA, RESP and RDSP: no such exception. The instructions' list of accounts whose holders are not treated as PFIC shareholders names only US plans, such as IRAs and 529 plans.

A small-holding exception can remove Form 8621 for a fund. No Form 8621 is needed for it if all your PFIC holdings together are worth US$25,000 or less (US$50,000 on a joint return) at year-end, you made no special PFIC election (QEF or mark-to-market) for it, and that year you had no excess distribution from it (roughly, a payout well above its recent average) and no gain on selling its shares (26 CFR 1.1298-1(c)(2)).

What are the FBAR and Form 8938 thresholds?

Convert Canadian-dollar values to US dollars, generally at the Treasury rate for the last day of the year, then compare (FinCEN instructions). File the FBAR if your foreign accounts together exceed US$10,000 at any time in the calendar year (FinCEN). If you must file a US return, file Form 8938 when your specified foreign financial assets are over either value in your row: the year-end value or the any-time value (Form 8938 instructions):

Abroad means your tax home is outside the US and you either were a US citizen living as a resident of another country for an unbroken period that includes a full tax year, or were in another country or countries at least 330 full days in 12 months in a row. Green card holders can use only the 330-day test. No Form 8938 is due if you do not have to file a US return.

Example

Illustrative only. Maya is a single US citizen living in Toronto who meets the living-abroad test for Form 8938. All figures are in US dollars, and each account's year-end value is also its highest value.

• RRSP worth $220,000. It earned $9,000 inside and she made no withdrawals. She has filed every required US return and never reported RRSP income on one.
• TFSA worth $40,000, holding one Canadian mutual fund that paid $1,500 of distributions. Assume the fund is a PFIC.
• Chequing account worth $8,000.

Different for you?

• You reported RRSP income yearly before, or have missed US returns. You may not be an eligible individual for the automatic deferral. See catching up on missed US returns or our cross-border tax service.
• You missed FBAR, Form 8938 or Form 3520 filings. See catching up on missed US returns.
• You are an American who just started filing from Canada. See Americans living in Canada.
• You hold a green card and file as a Canadian resident under the treaty. US tax and Form 8938 may no longer reach these accounts for that part of the year, but the FBAR still applies (IRS FBAR guide), and after 8 of the last 15 years with the card this can count as expatriating (Form 8854 instructions). See Americans living in Canada.
• You plan to give up US citizenship or a long-held green card. If you are a covered expatriate, an RRSP or RRIF can be taxed as if paid out the day before you expatriate (Form 8854 instructions). See our cross-border tax service.
• You live in a US state with an income tax. A state may not follow the treaty deferral. California, for example, taxes income inside an RRSP each year (FTB Publication 1001). See our cross-border tax service.
• You spend winters in the US. Becoming a US resident brings your Canadian accounts into US tax and reporting. See snowbirds and US residency.
• You want every foreign reporting form in one place. See foreign account reporting.
• You have an employer pension or a group plan. Different treaty and US rules can apply. See our cross-border tax service.