TFSA and FHSA for US Citizens: PFIC Funds, Keep or Close

Can a US citizen have a TFSA or FHSA, and what does each holding cost on the US return?

Yes, but Canada's tax break does not carry to the US return. The US generally taxes income inside a TFSA as it is earned, and no IRS guidance gives an FHSA a deferral either; how the IRS treats each registered account, including the unsettled question of whether a TFSA or FHSA is a foreign trust, has its own guide. What the account costs you each year depends on what it holds:

On top of the holdings, the account itself counts toward the FBAR when your foreign accounts together exceed US$10,000 at any time in the year (FinCEN), and toward Form 8938 above its thresholds (which accounts count). Above its income threshold, the net investment income tax also reaches this income, including PFIC excess distributions and sale gains (26 CFR 1.1411-10(c)); see why you still owe the IRS.

A case is not simple when the account holds several Canadian funds, you sell a fund at a gain, past years went unreported, or you plan to renounce. Gather each year's account statements, every purchase date and cost, each distribution with its date, and each fund's year-end value.

Is a Canadian ETF in my TFSA a PFIC?

Usually. A foreign corporation is a passive foreign investment company (PFIC) if 75% or more of its gross income is passive, or at least 50% of its assets, by average value, produce passive income or are held to produce it (Form 8621 instructions). A fund that holds a portfolio of securities meets both tests easily. A Canadian-listed ETF that holds only US stocks is still a Canadian fund, so the TFSA does not change the answer and neither does the country of the stocks the fund owns. Whether a particular fund is a corporation for US purposes, and so a PFIC, is covered in Form 8621 filing and missed years.

What a PFIC adds each year:

• Distributions. A regular payout is taxed as an ordinary dividend. It cannot be a qualified dividend, because a PFIC is not a qualified foreign corporation (Publication 550). The part of a payout above 125% of the average of the 3 previous years (or of fewer years, if you have held the fund less long) is an excess distribution, taxed like a sale gain (next section). There is none in the first year you hold the fund.
• Form 8621. One separate form per fund (instructions). No form is needed for a fund in a year when all the PFIC stock you own directly or indirectly, in every account and not only this one (funds held through an RRSP can count), is worth US$25,000 or less at year-end (US$50,000 on a joint return), you made no QEF election for it, and you had no excess distribution or gain from it (26 CFR 1.1298-1(c)(2)).
• No treaty relief. The pension exception that removes Form 8621 for funds inside an RRSP covers only plans the treaty treats as pension funds, which a TFSA or FHSA is not (26 CFR 1.1298-1(c)(4)).

The foreign earned income exclusion does not help: dividends, interest and capital gains are not earned income (IRS). See investing abroad as a US citizen and why you still owe the IRS after paying Canadian tax.

I already own a Canadian ETF in my TFSA: what is the US tax if I sell now, later or never?

With no election, the whole gain on a sale is an excess distribution. It is spread day by day over the time you held the shares. The part that falls in the year of sale, and in any year before the fund was a PFIC for you, is ordinary income. Each earlier year's part is taxed at the highest individual rate for that year, plus interest running from that year's return due date (Form 8621 instructions, Part V). A loss is outside these rules: it may be deductible under the normal rules, but it does not reduce the PFIC gain on another fund.

The election choice for a fund you keep, including what happens in the first year you elect, is covered in QEF and mark-to-market elections. Gains and distributions are reported in US dollars; the instructions give the currency rules for excess distributions.

How does the US tax options and covered calls I write in a TFSA?

The US taxes options written inside a TFSA as ordinary option trades, under Publication 550. The premium you receive for writing an option is not income when received; it waits until the option ends:

If the shares called away are a Canadian fund, that sale is a PFIC sale taxed as in the previous section, with Form 8621. A call is a qualified covered call only if, among other conditions, it trades on a national securities exchange or other market the Treasury approves and is not deep in the money; otherwise the straddle rules can defer losses, and the shares' holding period starts again when the call ends unless you had already held them more than a year when you wrote it (Publication 550).

If I close my TFSA or FHSA, what is taxed that year and which US forms are still due?

If you reported the account's income each year, taking the cash out generally adds no US income, because the US taxed that income as it was earned. What is taxed is any sale made to empty the account, under the rules above. For an account of deposits or GICs, closing changes only the reporting.

For the year you close it, these can still be due:

• FBAR, if your foreign accounts exceeded US$10,000 at any time that year.
• Form 8938, if your foreign assets were over its threshold for the year.
• Form 8621 for every fund sold at a gain or that paid an excess distribution, regardless of size.
• Forms 3520 and 3520-A, if the account is treated as a foreign trust, which is unsettled (registered accounts guide).

Once the closing year's forms are filed, no further US filing is tied to the closed account. If you move the units in kind to a non-registered account instead of selling, the US filings move with the fund; whether that move is a sale for US purposes depends on the same unsettled trust question.

An FHSA adds events the IRS has not addressed: a withdrawal Canada taxes because it is not for a first home, and a direct transfer to an RRSP or RRIF, which Canada defers (CRA). How the US treats either has no IRS answer; see how the IRS treats an FHSA.

What changes if the TFSA or FHSA is in my spouse's name and my spouse is not a US person?

The account generally stays off your US return, and your spouse's funds are not your PFIC filings, unless you and your spouse choose to file a joint US return. That choice treats your spouse as a US resident for income tax (Publication 519): the account's income goes on the joint return, each Canadian fund in it is a PFIC with its own Form 8621, and your spouse becomes a specified individual for Form 8938 (instructions). See married to a nonresident.

• US gift tax. Gifts to a spouse who is not a US citizen are excluded up to US$194,000 a year; above that, or for a gift of a future interest, you file Form 709 (Rev. Proc. 2025-32; Form 709 instructions).
• Canadian attribution. Canada's attribution rules in sections 74.1 to 74.3 do not apply to property you give your spouse while it is held in your spouse's TFSA or FHSA, as long as the account has no excess amount (Income Tax Act, s. 74.5(12)(c)). Once withdrawn, that protection ends.
• Paying in directly. A person who makes a gratuitous transfer to a foreign trust is its grantor, with Form 3520 reporting (instructions). If a TFSA or FHSA is a foreign trust, which is unsettled, your paying straight into your spouse's account could raise that question. The definition also covers a transfer made indirectly, so a gift your spouse then contributes is not automatically outside it.
• FBAR. Your spouse's account is not on your FBAR unless you have a financial interest in it or signature authority over it (which accounts count).

I gave up, or will give up, US citizenship: when do TFSA and FHSA filings stop?

TFSA and FHSA filings stop after the year that includes your expatriation date. That date is generally the day you renounced before a US consular officer, once a certificate of loss of nationality confirms it (Form 8854 instructions). After it, as a former citizen who is not a US resident, you are no longer a US person for the FBAR, Form 8938 or Form 8621.

For the year of expatriation, attach Form 8854 to that year's return. Form 8938 covers only the part of the year you were a specified individual (instructions). If you are a covered expatriate, most property you hold is treated as sold the day before your expatriation date, and net gain above an exclusion amount is taxed (Form 8854 instructions). Funds inside a TFSA or FHSA you are treated as owning are included; how the account itself is treated depends on the same unsettled trust question. IRS guidance does not say whether the PFIC tax and interest apply to that deemed sale of a Canadian fund.

One test for covered expatriate status is whether you can certify on Form 8854 that you met all federal tax obligations for the 5 years before expatriation; unreported TFSA funds or missing Forms 8621 can put that at risk. See renouncing US citizenship: getting compliant and the exit tax.

Which records should I keep for each fund inside the account?

Keep, for each fund, everything needed to rebuild its PFIC history, from the day you bought it or became a US person:

• each purchase: date (it sets how many years a sale gain is spread over), number of units and cost, including reinvested distributions;
• each distribution: date and amount, for the 125% test against the 3 previous years;
• each sale: date, units and proceeds;
• year-end value, for the small-holding exception and any mark-to-market election;
• exchange rates used for each US-dollar figure (IRS);
• every Form 8621 filed, and any fund annual information statement if you made a QEF election.

For the account, keep the yearly statements and the maximum value used on each FBAR, for at least 5 years. Periodic account statements may be relied on for a fund's year-end value (26 CFR 1.1298-1(c)(2)(iv)).

Example

Illustrative only; amounts are in Canadian dollars and must be converted to US dollars on the return.

Selling a Canadian ETF held four years

Maya, a dual citizen in Calgary, put C$40,000 into one Canadian all-in-one ETF in her TFSA over four years and sells it with a C$12,000 gain. Canada taxes nothing. On the US return, with no election, the whole gain is an excess distribution. Assume, to keep it simple, it spreads evenly at C$3,000 a year:

She files Form 8621 for the year of sale whatever the fund is worth. For earlier years, it was due for each year her PFIC stock was worth more than the small-holding exception at year-end, which C$40,000 is once converted. Real lots bought at different times are each spread over their own holding days.

Interest on a TFSA savings deposit

Leo keeps C$20,000 in a TFSA savings deposit earning C$800 of interest a year. He reports the interest, in US dollars, on each year's US return. No Form 8621: a deposit is not a fund. The account still counts toward his FBAR, since C$20,000 is over the US$10,000 threshold once converted.

Funding a Canadian husband's TFSA

A US citizen gives her Canadian husband C$7,000 a year, and he contributes it to his own TFSA. The gift is well under the noncitizen-spouse annual exclusion, so no Form 709. Canada's attribution rules do not apply while the money is in his TFSA, and his TFSA income stays off her US return unless they choose to file jointly. Whether her gift, once he contributes it, is an indirect transfer to a foreign trust is unsettled (see the spouse section above).

Different for you?

• You hold several Canadian funds, or you are about to sell one at a gain: the year-by-year PFIC calculation decides the cost; get cross-border tax help.
• You never filed Form 8621, the FBAR or TFSA forms for past years: see missed FBAR or TFSA forms and Form 8621 filing and missed years, with cross-border tax help.
• You want to keep a fund and change how it is taxed: see QEF and mark-to-market elections.
• You plan to renounce US citizenship: see renouncing US citizenship: getting compliant, the exit tax and cross-border tax help.
• You bought Canadian funds before becoming a US resident: see PFIC rules when moving to the US.
• You now live in the US and still hold the TFSA: see RRSPs and TFSAs after leaving Canada.
• Your family has an RESP: see RESPs and US tax.