# Form 3520 for TFSA?



## 1763701

My question is filling the IRS form 3520 (Trusts).

I am a US citizen and I live in Canada. I have 2 TFSA accounts (tax free savings accounts). Reporting rules for TFSA's are different for US citizens. As everyone is likely aware, they are not yet tax part of the tax treaty and must be reported as income.

One TFSA I have had a for three years and I have reported it on my FBAR and reported the interest in my income. The other is new created this past year with a transfer of some of the funds from my original TFSA. I have it is invested in stocks, etc. I was trying to research how to report capital gains on my new account when I discovered this form 3520 was required.

It sounds like a lot of people are unclear if the TFSA is exempt from the new filling waver on retirement accounts from the IRS. I don't want to file and be on the radar face potential fines, but I want to make sure I am in compliance.

Any help would be very much appreciated.

Thanks


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## Moulard

The IRS has been handing out 3520 and 3520A fines like confetti of late so tread with caution. Many have been challenged and the IRS is walking back on lots of them..

If it is a retirement account, it may be exempt under Rev Proc 20-17, which was a response to the backlash from the confetti.



https://www.irs.gov/pub/irs-drop/rp-20-17.pdf



I figured that the IRS preferred to exclude foreign retirement vehicles than have its contradictory positions on things like filing deadlines examined too closely in tax court, so this RP is in essence the IRS blinking.


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## 1763701

Moulard said:


> The IRS has been handing out 3520 and 3520A fines like confetti of late so tread with caution. Many have been challenged and the IRS is walking back on lots of them..
> 
> If it is a retirement account, it may be exempt under Rev Proc 20-17, which was a response to the backlash from the confetti.
> 
> 
> 
> https://www.irs.gov/pub/irs-drop/rp-20-17.pdf
> 
> 
> 
> I figured that the IRS preferred to exclude foreign retirement vehicles than have its contradictory positions on things like filing deadlines examined too closely in tax court, so this RP is in essence the IRS blinking.


Moulard, Thank you for response and the link. I will see whats on their site. It does seems that US purposefully make rules very difficult to understand. I just find Canada much more straight forward to deal with.


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## Nononymous

If you are a US expat and still need to play by the rules, this is more difficult. If you want to simply report your TFSAs as "savings accounts" instead of "trusts" and skip the whole 3520 mess, at least be aware that TFSA accounts are not subject to FATCA reporting, under the terms of the US-Canada IGA. The IRS only knows what you tell it.

Dual citizens are in a much better position - they can freely ignore any and all US filing requirements, provided of course they have no financial interests south of the border.


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## 1763701

Nononymous said:


> If you are a US expat and still need to play by the rules, this is more difficult. If you want to simply report your TFSAs as "savings accounts" instead of "trusts" and skip the whole 3520 mess, at least be aware that TFSA accounts are not subject to FATCA reporting, under the terms of the US-Canada IGA. The IRS only knows what you tell it.
> 
> Dual citizens are in a much better position - they can freely ignore any and all US filing requirements, provided of course they have no financial interests south of the border.


Thanks Nononymous - I am dual but unfortunately I have more financial interests on both sides since I was planning to return to to the US for a few years before covid hit.


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## 1763701

Would anyone mind sharing how they claim capital gains for a TFSA? 

I plan to include on Schedule D form 8940 but I only have a 1099 for a DIV payment. Will it flag someone if I submitted a page of non-reports gains without a 1099?

Thanks, any help appreciated.


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## Jca1

The argument that the TFSA is a trust has never seemed to make much sense. Typically no one else takes title to the property, performs fiduciary duties, or makes investment decisions on behalf of the account holder, and the account holder has full control over the contributions and withdrawals. This is a description not of a trust but of an ordinary savings or investment account with some tax exemptions under Canadian (but not US) tax law. The same reasoning applies to UK ISA accounts. The confusion, I think, comes from there not really being an analogous type of tax-free account in the USA and misguided attempts to understand it as another country's version of the IRA.

I understand there is a type of TFSA called an "agreement in trust" that might deviate from this somewhat, but it's unlikely the IRS will ever look into your account in that level of detail, and in any case, doing "protective" 3520/3520-A reporting that may not be required often greatly increases the risk of penalties, which can be massive and nearly impossible to get rid of, rather than decreases the risk.


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## Moulard

JCA makes a good point.

If the account holder maintains full control, then by definition it is not a trust. 

Per § 301.7701-4 An ordinary trust is an arrangement created either by a will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries.

If there is no transfer of property to another person to protect or conserve then it is not a trust.

I am simply not familiar enough with TFSAs to say whether or not it might be considered an "investment trust" but even then not all investment trusts are classified as trusts..


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## readmylips_nonewtaxes

Nononymous said:


> Dual citizens are in a much better position - they can freely ignore any and all US filing requirements, provided of course they have no financial interests south of the border.


This is news to me. Would you be willing to elaborate exactly where this information originates? I am a full year Canadian resident and dual citizen. I have remaining in the US a mutual fund, a chequing account, and a credit card. If I close all of these, I no longer need to file US tax returns? And if in 20 years I return to the USA to be a resident, I just start filing returns again? Nothing suspicious there?



Moulard said:


> The IRS has been handing out 3520 and 3520A fines like confetti of late so tread with caution. Many have been challenged and the IRS is walking back on lots of them..


I was wondering if you have any additional information on the specific cases? There was this recent posting by a cross-border tax attorney which claims to have had all penalties abated for failure to file 3520/3520-A forms for a TFSA. An Update on Form 3520 + 3520-A for the TFSA | Polaris Tax Counsel I had been avoiding the TFSA until this article emerged.


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## Nononymous

readmylips_nonewtaxes said:


> This is news to me. Would you be willing to elaborate exactly where this information originates? I am a full year Canadian resident and dual citizen. I have remaining in the US a mutual fund, a chequing account, and a credit card. If I close all of these, I no longer need to file US tax returns? And if in 20 years I return to the USA to be a resident, I just start filing returns again? Nothing suspicious there?


I wouldn't necessarily recommend returning to the US. What I am suggesting is wholly practical and completely illegal (in US terms). By the sounds of all your other posts you're in pretty deep with the reporting.

Otherwise, if you are a Canadian citizen living in Canada, what you do is quite simple. Don't report US person status to any financial institutions, so that you are not subject to FATCA reporting. (This is easy even if you are born in the US, as Canadian banks only require a drivers license as ID.) Don't file any US tax returns or FBARs. That's it. Estimates of global compliance rates suggest that only 10 percent of US persons abroad actually file. The IRS does not have the resources to pursue them, and the ROI would be very poor in any case given the likelihood of little being owed, plus the extreme difficulty in collecting.

If you had never started filing after returning from the US, you'd simply have dropped off the radar and there would be no trace of you in Canada. That would be preferable to where you are now. If you were to suddenly cease filing and the IRS decided that you owe it money, there's not a great deal it can do to you. Per Article 26 of the tax treaty, CRA will not assist with collection against a Canadian citizen. But this would make any sort of eventual return difficult. 

If you're sick of filing, you can renounce. If you're determined to move south one day, embrace the paperwork. Or go dark and take your chances.


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## readmylips_nonewtaxes

Nononymous, thank you for the additional clarity here. Yes, I file by the book to the best of my ability, otherwise I don't sleep well! It is quite a bit of extra paperwork that I don't enjoy, but the years of effort finally received some perk with receipt of US stimulus payments, though still not even close to being worth the filing effort. There has been some push for residency-based taxation, but change is slow. Residence-Based Taxation (RBT). What is it? What Does it Mean? | Washington, DC | I supose residency based taxation might result in a deamed disposition of all property when moving out of the USA though, so...

Also, based on some online readings, renunciation has become increasingly costly, lengthy, and difficult. Might be easier to keep on filing. Also, wouldn't renounciation result in a deamed disposition of all property? If so, it would be ideal to slowly realise capital gains over the next several years.


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## Nononymous

Renunciation currently costs $2350, but it's effectively a freebie this year and this year only thanks to the stimulus benefit more than covering the cost. There will be a long wait to get an appointment thanks to the pandemic (I'm in the queue myself, expect it'll be next year) but the process itself is simple and quick - one appointment, sign some papers, hand over your credit card, wait for your CLN to arrive in the mail.

There is no actual tax component to renunciation - you will not be asked about compliance. Making a formal exit from the US tax system - filing Form 8854 and potentially paying an exit tax and all that - is a separate process. Those who are not already filing generally don't bother - why enter the US tax system simply to leave it again? The IRS recently admitted that 40 percent of those who renounce do not file Form 8854. (I don't intend to file anything after renouncing.)

I'm not optimistic that changes to citizenship-based taxation will happen in any of our lifetimes. But it doesn't particularly matter insofar as it's perfectly safe not to file anything if you don't have US financial entanglements. A much bigger problem - one for which renunciation is sometimes the only cure - is dual citizens born in the US being denied financial services, due to banks' overreaction to FATCA rules. This is mostly an issue in Europe; Canadian banks are fortunately very lax, they don't really validate customers' answers so it's easy to conceal US person status, and even those who identify themselves are not prevented from opening investment accounts.


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## readmylips_nonewtaxes

Fascinating. I had read the opposite online, e.g. you need to ensure that you have 5 years of US taxes in perfect order to renounce, and if not, they will ensure you get them in order first. I don't recall exactly which sites I read this on, but perhaps some law websites where they try to scare clients in order to bring in back-tax filing revenue. I also read about a rather tense and in-depth exit interview.

If 40% of renounciates are not paying the exit tax on deemed disposition of assets, it could be because 40% don't own any property of significant value. I can see some college kid moving up to Canada might not own much. A more interesting statistic would be those who actually have a modest capital on exit and not deeming the disposition on Form 8854. Maybe that number is closer to 10% - I don't know.


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## Bevdeforges

That exit tax thing doesn't apply to those with less than a certain (rather high, in my opinion) level of income (as judged by the taxes due the last five years - has to be in the six figure range) and/or net assets as of the date of renunciation (at least a couple million dollars worth). 

But it's a decision that has to be taken in full consideration of all your own personal facts and circumstances. It's usually not too painful to continue filing during your working years, since your "earned income" is usually pretty much subject to the earned income exclusion. As you get closer to retirement or get interested in investing in your country of residence, the situation starts to change. And, of course, if you might consider moving to the US for any reason in the future, probably best and easiest to hold on to your US citizenship. As the old saying goes, "your mileage may vary." <g>


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## Nononymous

readmylips_nonewtaxes said:


> I don't recall exactly which sites I read this on, but perhaps some law websites where they try to scare clients in order to bring in back-tax filing revenue. I also read about a rather tense and in-depth exit interview.


It's a common misperception to which compliance firms absolutely contribute. You've doubtless come across Moodys Gartner - they are very good at this. Where did you read about the renunciation interview, if you can recall?

The IRS report is here, plus good discussion at the Isaac Brock Society (can't post the link). It wasn't 40 percent not paying the exit tax, but rather 40 percent not filing any exit paperwork (which makes it difficult or impossible to determine whether any exit tax was owed).


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## readmylips_nonewtaxes

Sorry, but I do not recall the website. It was about a year ago now. It was probably from one of those law websites looking for clients or some news feed. Most of the law websites do a very good job of scaring their readers. I'd prefer to find a firm that is a bit more impartial. Like that posting on the polaris law website which actually attempts to help the reader and put them at ease, An Update on Form 3520 + 3520-A for the TFSA | Polaris Tax Counsel It is another approach which surely also brings in clients, just in a more humane fashion.

I've considered hiring them to figure out why my Canadian brokerage firm is mis-representing my US REIT dividends as qualified on my 1099-DIV. I've asked this question on four different forums and thus far nobody seems to know why. 

Please report back after your exit interview! Maybe you will put us at ease. Although, to the best of my ability, my 1040's should be in good shape. But what if I want to retire in Hawaii? Canada needs some tropical territories.

I wonder how many dual citizens who leave Canada to return to the US fill out the deemed disposition paperwork? Apparently, if you leave Canada and later return, you can get some of the tax on those deemed dispositions back! What mess.


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## Bevdeforges

readmylips_nonewtaxes said:


> I've considered hiring them to figure out why my Canadian brokerage firm is mis-representing my US REIT dividends as qualified on my 1099-DIV.


The only way you're going to "figure out" why your Canadian brokerage firm did what they did is to pin them down directly. In the meantime, you can certainly report your dividends as you believe they should be reported - and then see if anyone at the IRS comes back to you about it. 

Paying a tax adviser to figure out why your broker did or didn't do something seems a bit wasteful. The other thing to remember is that tax advisers have to be registered with the IRS, so they pretty much have to take a conservative approach to filing if they want to continue in the tax preparation business. The technical term for this is CYA, I believe.


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## readmylips_nonewtaxes

Bevdeforges said:


> The only way you're going to "figure out" why your Canadian brokerage firm did what they did is to pin them down directly. In the meantime, you can certainly report your dividends as you believe they should be reported - and then see if anyone at the IRS comes back to you about it.
> 
> Paying a tax adviser to figure out why your broker did or didn't do something seems a bit wasteful. The other thing to remember is that tax advisers have to be registered with the IRS, so they pretty much have to take a conservative approach to filing if they want to continue in the tax preparation business. The technical term for this is CYA, I believe.


I've been at them for weeks now. The problem is that the investment reps. don't understand much about classification of dividends for US persons. I have had to write a 10 page instructional essay to them with much detail and provide all the Form 10-K's, annual reports, and Form 8937 for a handful of funds. These senior investment reps. have to forward my complaints to their tax department, and I feel that a lot of detail gets lost in translation. They won't let me speak to their tax department directly. For more than a week, the investment rep. kept thinking I am talking about the dollar amount of the dividend being wrong, although I clearly stated it was the classification of the dollar amount.

After weeks of this, I finally received a reply from a manager in their tax department (via the investment rep. middleman), but the answer provided no insight. I can forward their answer via private message if you are interested. It is hard to paraphrase, but they said that the information was processed based on DTC *and is correct*. They say that they don't get information from annual reports to shareholders. For the Form 10-K's I submitted to them for 2020, they claim it was not signed until well into 2021, but that is not true; it was signed off before the end of February, which is enough time to generate a correct 1099-DIV. This is pretty standard from what I can discern.

For 2020, for example, this particular REIT distributed 100% ROC. Now if we assume that they went by 2019's Form 10-K instead, that form said "Our 2019 dividend distributions are expected to be characterized for federal income tax purposes as 73% ordinary dividend income and 27% long-term capital gain dividend income." So even if they used old information, Form 10-K still did not say "100% qualified dividends", which is how the brokerage firm is classifying the REIT dividends.

They also said that Form 8937 was not signed off until "well into 2021", but I am looking at a pen-to-paper signature of a scanned PDF with a date of 1-28-2021, plenty of time before 1099-DIV forms are printed. Their excuse sounds bogus. If a large brokerage has made global mistakes to all their US clients, I doubt they would want to admit it; it would be costly and upset a lot of clients. Can you image all the calls they would get if they fixed the issue? "Hey, why are all my dividends not qualified this year?" Try being the rep. who had to explain that to their wealthy clients.

I don't feel good filing my US taxes not understanding what is going on here with 100% certainty. It looks to me like the Canadian brokerage firm has goofed, and has likely goofed for all their US clients. But I am just an investor; wouldn't an experienced brokerage firm know more than I? I must be missing something.

EDIT: Does DTC even provide information like how much of an REIT dividend gets classified as ROC, cap. gain, section 199A div, section 1250 gain, qualified div, ordinary div, etc?


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## Nononymous

readmylips_nonewtaxes said:


> Please report back after your exit interview! Maybe you will put us at ease.


There won't be much to report. There are hundreds of interview accounts out there, at Brock and elsewhere. It's generally very quick and perfunctory - the consular officials only need to ensure that you are of sound mind, not being coerced, and fully understand the implications. There are no questions about taxes or money.



readmylips_nonewtaxes said:


> I wonder how many dual citizens who leave Canada to return to the US fill out the deemed disposition paperwork? Apparently, if you leave Canada and later return, you can get some of the tax on those deemed dispositions back! What mess.


It's not really a mess, it's the normal procedure for most countries: if you leave permanently and become non-resident, there is generally some settling of accounts. If you leave Canada, you become non-resident and there is a deemed disposition of some but not all assets. I don't know that much about it, but I believe that RRSPs and possibly other registered accounts are exempt, as is real estate. It can be an expensive proposition for those with other investments, but I also believe that you can defer payment if you intend to return.

Anyone moving to the US generally wants to become non-resident so they don't pay additional tax in Canada. Once they change their address on the their tax return, they are non-resident. I don't know how the rest of the deemed disposition paperwork functions, or whether one can avoid it. But also expect that many people don't have the sorts of investments subject to this, so it's not a problem for them.


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## readmylips_nonewtaxes

Nononymous, don't they ask you during the exit interview why you are renouncing? And when someone replies any sentence with the word "tax" in it, do they not ask if your taxes are in order?


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## Bevdeforges

readmylips_nonewtaxes said:


> Nononymous, don't they ask you during the exit interview why you are renouncing? And when someone replies any sentence with the word "tax" in it, do they not ask if your taxes are in order?


No, they don't ask you why you are renouncing. If you like, you can submit a statement explaining your decision. But you can also say you don't want to and that's that. Renunciations are handled by the consulates, which are part of the State Department. While they do certain information gathering for the IRS, there is no real love lost between State and the IRS. At no point in the renunciation process will they ask you anything about your tax status. They probably will "remind" you that any tax liabilities incurred before your date of renunciation remain yours to deal with. But as of your date of renunciation you are off the hook.


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## Nononymous

readmylips_nonewtaxes said:


> Nononymous, don't they ask you during the exit interview why you are renouncing? And when someone replies any sentence with the word "tax" in it, do they not ask if your taxes are in order?


What Bev said. You are not required to give a reason. And most people are smart enough not to say "because I don't want to pay US tax" during the interview.

The State Department has no way to check a person's tax records. They really aren't interested.


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