# TFSA tax confusion



## rvnls55

I have had my US tax returns prepared by several cross border "professionals", and have consulted many tax experts and they all have a different opinion as to whether or not a TFSA is considered a trust and therefore requires the filing of forms 3520 and/or 3520A. The holdings in the TFSA are either GICs or individual stocks.
Does anyone know the IRS position on this matter?
Thank you.


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## BBCWatcher

There is no specific IRS position yet. Your current options are to interpret the tax code and apply it to this situation as best as you can, and probably with professional advice, or to avoid TFSAs completely.


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## maz57

To the best of my knowledge the IRS has offered no clarification which specifically addresses Canadian TFSA accounts. Depending on the holdings within the account a TFSA may or may not be a trust. Several Canadian institutions have stated that their particular product is not a trust, but how the IRS would define them is what really counts, not the financial institution's definition. Don't expect any help from the IRS anytime soon; they have far more serious problems to work on. There are tax-advantaged accounts all over the world and the IRS has never offered any guidance to expats for most of them.

Back when I was facing the same question (I've since shed US citizenship and don't have to deal with this anymore) my TFSA was included under an umbrella account number with other accounts at my financial institution. Rather than breaking it down and reporting sub-accounts I simply added everything together and reported the aggregate balance and income under the umbrella number without further elaboration. This dodged the question and was probably not correct but the IRS never questioned it. My reasoning was that even though not technically correct at least I couldn't be accused of failure to report income.

This is a failing of the US tax system which tries to pretend expats live in the US when in fact they don't and is not likely to be fixed anytime soon. This issue and a host of others were what caused me to decide to get rid of US citizenship. That is the only real solution until such time as the US wakes up and switches to RBT like the rest of the world.


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## StewartPatton

rvnls55 said:


> I have had my US tax returns prepared by several cross border "professionals", and have consulted many tax experts and they all have a different opinion as to whether or not a TFSA is considered a trust and therefore requires the filing of forms 3520 and/or 3520A. The holdings in the TFSA are either GICs or individual stocks.
> Does anyone know the IRS position on this matter?
> Thank you.


It doesn't matter whether a TFSA is considered a trust. It matters whether a TFSA is considered a grantor trust with you as a/the grantor. 

The IRS hasn't said anything about this issue specifically, and things they've said about the matter more generally are difficult to apply to this specific fact patter. Which is why those who want professional help hire a professional and rely on their advice. If you don't want to rely on the advice of the professional you hired, then find a new professional.


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## jbr439

It's indicative of the sorry state of affairs for expats that what should be a straightforward question about a *very* common type of Canadian account is, in effect, unanswerable.


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## StewartPatton

jbr439 said:


> It's indicative of the sorry state of affairs for expats that what should be a straightforward question about a *very* common type of Canadian account is, in effect, unanswerable.


Meh. Lots of tax questions are like that. The IRS just doesn't have the manpower to provide definitive guidance on the multitude of issues that come up in the real world.

That's why people hire tax attorneys. (Or they don't, they just ***** on the internet, which is cheaper and probably more fun anyway. Plus free advice on internet forums is always correct--you just have to pick a poster with a confidently stated opinion and go with it.)


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## jbr439

StewartPatton said:


> Meh. Lots of tax questions are like that. The IRS just doesn't have the manpower to provide definitive guidance on the multitude of issues that come up in the real world.
> 
> That's why people hire tax attorneys. (Or they don't, they just ***** on the internet, which is cheaper and probably more fun anyway. Plus free advice on internet forums is always correct--you just have to pick a poster with a confidently stated opinion and go with it.)


Tax questions that are like that are usually ones that pertain to some particular circumstance, no? There is nothing unusual or peculiar about the TFSA. It is a very common type of account in Canada, where a large number of USCs live.

As well, rvnls55 said "I have had my US tax returns prepared by several cross border "professionals", and have consulted many tax experts and they all have a different opinion as to whether or not a TFSA is considered a trust". So he has hired tax professionals, and they can't agree. What more is he supposed to do when the professionals all give him a different answer?


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## rvnls55

Thanks to all. I guess there is some relief in knowing I am not the only one frustrated by this issue. Trying to be compliant but there don't seem to be any concrete guidelines.
Oy well!


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## Nononymous

Ergo, don't try to be compliant.


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## StewartPatton

jbr439 said:


> Tax questions that are like that are usually ones that pertain to some particular circumstance, no? There is nothing unusual or peculiar about the TFSA. It is a very common type of account in Canada, where a large number of USCs live.
> 
> As well, rvnls55 said "I have had my US tax returns prepared by several cross border "professionals", and have consulted many tax experts and they all have a different opinion as to whether or not a TFSA is considered a trust". So he has hired tax professionals, and they can't agree. What more is he supposed to do when the professionals all give him a different answer?


"There is nothing unusual or peculiar about this one little fact pattern I decided to pick out of a hat. Oh sure, I could have picked about a million others, but I picked this one, which I assure you is common as dirt." OK dude.

On the second part, we of course have no way to judge the quality of advice that the OP has received from anyone, because we don't know anything about those people and we're not privy to the exact conversations between the OP and any of those advisors. And we don't even know whether the advice from one contradicted the advice from any other--we can't assume the OP is a 100% reliable reporter on that issue. So, meh. It's uninteresting, contentless even. There's nothing to discuss here.


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## maz57

jbr439 said:


> As well, rvnls55 said "I have had my US tax returns prepared by several cross border "professionals", and have consulted many tax experts and they all have a different opinion as to whether or not a TFSA is considered a trust". So he has hired tax professionals, and they can't agree. What more is he supposed to do when the professionals all give him a different answer?


Renounce his US citizenship ASAP. Stop spending money on so called "experts". Nobody knows the answers to these questions, not even the IRS. This will not be fixed in our lifetimes because the US government doesn't care about its expats. With the ramped up reporting of FATCA it will continue to get worse.


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## jbr439

StewartPatton said:


> "There is nothing unusual or peculiar about this one little fact pattern I decided to pick out of a hat. Oh sure, I could have picked about a million others, but I picked this one, which I assure you is common as dirt." OK dude.


In other words, you have nothing specific to say as to what should make a vanilla TFSA so confounding despite the fact that it's similar to, and just as common in Canada as, Roth IRAs.


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## StewartPatton

jbr439 said:


> In other words, you have nothing specific to say as to what should make a vanilla TFSA so confounding despite the fact that it's similar to, and just as common in Canada as, Roth IRAs.


No. You don't realize that there are tons and tons and tons of little tiny specific questions that people really care about but there is absolutely not guidance on from the IRS. You have picked one such question, and you think it's some terrible thing that there's no guidance on it, but you only think that because you don't realize that there are lots of these areas and the one you are focusing on isn't really all that special or unique.


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## BBCWatcher

TFSAs can and do vary in their construction and holdings in ways that are meaningful for U.S. tax treatment -- PFICs, for example. The fact they're "standard" in some other country doesn't actually matter. I don't expect Singapore's tax code to know what the heck a U.S. Roth IRA is as such, for example. But Singapore's tax code does refer to capital gains and dividends, and I can reasonably apply that guidance to the situation I'm in.

Do the best, most reasonable job you can applying the tax code to your particular circumstances, with professional advice if you wish/need. Or, if it's so overwhelming, get out of TFSAs. Do not expect the IRS (or any country's tax agency) to recognize anything foreign by name, in part because that foreign government has the power to change the definition of their construction at any time.


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## Bevdeforges

Have to admit that I get a bit tired of the Canadians going on about their various "peculiarities" vis a vis the US tax system, though I suppose they are the most "exposed" to potential review/audit by the IRS simply based on proximity.

Over here in Europe, there are gobs of different types of perfectly normal accounts that our home governments consider tax-free or tax-deferred - even accounts and investments that are virtually identical to the tax-deferred investments in the US, and no definitive guidance on how the IRS wants them treated on the forms.

The international IRS offices (in London, Paris and Frankfurt) used to be really helpful on these matters, but those bureaus are being closed down and the staff recalled to the US. The key thing seems to be to take a tax stance on what these foreign accounts are and how they should be treated, based on your understanding of the tax law - and stick to it in a consistent manner. 

Ultimately, it comes down to the sum total of all items on your returns, an evaluation of any "discrepancies" and a certain level of auditor's hunch that determines if any one item will be questioned or if your entire return will be audited. If it comes down to an audit (or even a question) all your tax preparer can do for you is to explain why he or she treated a specific item the way he or she did. Ultimately you're still responsible for the submitted return.
Cheers,
Bev


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## maz57

A poster on another forum came up with a different angle which may bear on the TFSA situation (and any other foreign accounts as well). He stated that "the IRS requires returns to be processable, not truthful".

My take is that if a return goes through the IRS system without causing a hiccup then you are probably OK. I don't think the IRS pays very much attention to expat returns simply because it is so time consuming and difficult for them to check or verify any of the information. A taxpayer with no US assets is pretty much beyond their reach anyway.

Our favorite blowhard Senator Carl Levin summed up the US government's attitude toward foreign accounts: "There is simply no good reason why ANY American would have a foreign account." 

That's what we're dealing with here, folks.


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## StewartPatton

maz57 said:


> A poster on another forum came up with a different angle which may bear on the TFSA situation (and any other foreign accounts as well). He stated that "the IRS requires returns to be processable, not truthful".


What? No. That's just ridiculous. Good ol' internet wisdom strikes again.

The IRS has forms, and they have instructions for how to complete those forms, and the forms and instructions are all written in the context of laws, regulations, and interpretive guidance. You have to fill out the forms to the best of your ability in the context of all that guidance, using reasonable interpretations and interpolations and extrapolations of such guidance where necessary/desirable. 

I could produce a "processable" IRS Form 1040 for a client that is nowhere near "truthful," and that's not OK.


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## kulzerdipadova

This information may help you... "The conventional wisdom that a TFSA is a foreign trust is based on an analogy to the IRS tax treatment of an RRSP. Without the substantiation of legal concepts, in notice 2003-75 the IRS classified an RRSP as a foreign trust. The IRS position on an RRSP and a RRIF does not automatically apply to a TFSA, which is created under different statutory and contractual arrangements".

Thanks for sharing...


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## maz57

Ah, but you're missing the point, S.P. What you don't want to happen with your filing is to have it kicked out of the system with some kind of error or omission which bring it to the attention of a human. Filing a return which passes through the automated system is the best chance of avoiding additional scrutiny.

The IRS basically has to take expat filers word for it because they have virtually no information coming in to cross check. As you pointed out yourself the IRS has not issued "interpretive guidance" for most foreign accounts. If one has declared the income and paid any resulting tax who cares if the return is technically incorrect? Besides, "truth" is a nebulous thing when it comes to the US tax code, as evidenced by the conflicting opinions of the experts.


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## StewartPatton

Well, sure, in a situation where the guidance is such that you don't know exactly how to file a certain form, it is better to file it in a way that isn't some internally inconsistent mess that the computer will just **** out. 

But the poster I was responding to took that idea too far--he said that the goal is simply to file something that sails through. That's not the goal at all. A return could sail through but be indefensible on audit, and that's not a good position to be in.


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## Bevdeforges

StewartPatton said:


> Well, sure, in a situation where the guidance is such that you don't know exactly how to file a certain form, it is better to file it in a way that isn't some internally inconsistent mess that the computer will just **** out.
> 
> But the poster I was responding to took that idea too far--he said that the goal is simply to file something that sails through. That's not the goal at all. A return could sail through but be indefensible on audit, and that's not a good position to be in.


Though whether it matters if the return is defensible on audit or not kind of depends on if the return ever becomes subject to an audit. There are ways to make a return less liable to be kicked out for a second look, or an audit.

In your case, however, as a paid preparer, yes you have a higher standard to meet in preparing other people's returns for a fee. And, if you were to be associated with a significant number of "dodgy looking" returns, you would be doing both yourself and your clients a major mis-service. (Because they do track tax preparers known to take indefensible positions.)
Cheers,
Bev


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## maz57

In view of the fact that that most (96%, according to BBC) expat returns result in no tax owing, its not likely they will be audited. But yeah, having a logical explanation just in case is never a bad idea. (Does "I can't make any sense of your incomprehensible 75,000 page tax code" count as an acceptable explanation?) LOL.


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## jbr439

@BBCWatcher
The contents of a TFSA are a whole different question and not what the OP is interested in. He simply wants to know whether a TFSA (consider it empty or just holding cash if it helps) is considered to be a foreign trust, as he must then file forms 3520 and 3520A, under threat of *severe* penalty I might add.

I'd also say that comparing that situation to Singapore capital gains and dividends is sketchy. Capital gains and dividends are relatively easily understood concepts that are reasonably constant in meaning across countries. The tax treatment of them may differ on a country to country basis, but as far as identifying what is or is not a capital gain (or dividend) by US or Singapore standards, that's fairly straightforward. Obviously not so when it comes to foreign trusts. Not to mention that Singapore doesn't care about capital gains and dividends earned by its expats.

Finally, if the US insists on having CBT, and thus insists on making each and every one of its expats subject to taxation and information reporting (unlike just about every other country in the world), then is it really too much to expect that the IRS can either answer questions on what is or is not a "foreign trust", *or* at are least provide a definition that a person of moderate intelligence can use to determine with some degree of certainty whether a particular account conforms to what the IRS considers to be a foreign trust?

You're a defender of "mild CBT", yet you are basically saying that it's perfectly fine if CBT results in expats having to have to pay professionals to *maybe* determine whether their ordinary (to them) accounts are foreign trusts. And I'm not even talking about how ludicrous it would be for a TFSA to be considered a foreign trust (that's a different topic).


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## jbr439

jbr439 said:


> @BBCWatcher
> ...
> Finally, if the US insists on having CBT, and thus insists on making each and every one of its expats subject to taxation and information reporting (unlike just about every other country in the world), then is it really too much to expect that the IRS can either answer questions on what is or is not a "foreign trust", *or* at are least provide a definition that a person of moderate intelligence can use to determine with some degree of certainty whether a particular account conforms to what the IRS considers to be a foreign trust?
> ...


Another option would be to have a "same country exemption" for "foreign trust" reporting as many (ACA, perhaps Democrats Abroad) are suggesting should be done for FATCA.

And yet another option would be that any account that is not FATCA reportable is not considered reportable as a foreign trust. TFSAs are *not* FATCA reportable and thus pretty much by definition are not considered to be vehicles for tax evasion - yet, 3520/3520A reporting continues (maybe).


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## BBCWatcher

maz57 said:


> In view of the fact that that most (96%, according to BBC) expat returns result in no tax owing....


The figure is 94%, and it's Villanova Professor J. Richard Harvey's estimate, not mine. (Though I find it to be at least plausible.)



Jbr439 said:


> I'd also say that comparing that situation to Singapore capital gains and dividends is sketchy. Capital gains and dividends are relatively easily understood concepts that are reasonably constant in meaning across countries.


Then you'd be surprised. I didn't provide this example as a mere hypothetical.

Same answer: do the best you can to apply the rules, instructions, and tax code to your particular situation, relying on professional advice if you wish/need.


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