# Do I need to file 3520



## lcotten

Hi, 

I'm wondering if I need to file a form 3520 in this situation....

I opened a TFSA early last year (April). I subsequently learned of the horrible tax treatment the IRS has for this and decided to close it. The account was closed by the end of October last year (2013). It was simply a savings account (no equity products, GIC, etc) and I only earned a couple dollars interest.

What's your sense of this - do I need to file a 3520 / 3520-A when a simple TFSA was opened and closed in the same year? Of course, I would still declare the interest over those few months...

Lloyd


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## Nononymous

Need - as in what are you legally required to do, or what could you get away with? Pretty clearly no one would ever know if you didn't bother, but technically who knows?


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## BBCWatcher

This seems like one of those cases where if you're asking you already know the answer.


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## graubart

If you search around the Canadian/America tax forums, you will find opinions that a simple savings account isn't trust. Some of the banks deny it is a trust.

The 3520/3520A reporting requires copies of all trust documents. Of course there are no trust documents associated with a bank account.

I was in your situation two years ago. I had opened the TFSA without realizing the implications and then closed it the same year when I found out. I did file the 3520 and 3520A but I'm not sure I would do it again if faced with the choice.

I not only had to explain to the IRS why I couldn't produce any trust documents but I also had to explain why I was reporting a simple bank account as a trust in the first place.

Tough choice.


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## BBCWatcher

There's another option: put "See Statement X" next to the line on the regular IRS form (1040 usually) where that information would roll up, where X is a sequential number -- if you have more than one statement it would be 2, 3, or some higher number. Then attach a separate piece of paper with the statement (and filer's name and Social Security number at the top) that describes the account particulars.

If the IRS then wants a 3520 they'll get back to you, but probably not.


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## maz57

I found myself in a similar situation a couple of years ago and concluded the TFSA was not a trust, didn't need a 3520, and reported the interest along with my other interest bearing accounts. If the financial institution is not sending you an annual statement of trust and merely pays interest, it is not a trust. Just report the interest on Schedule B.

Note that under the proposed Canada/US IGA a TFSA will not be a "US reportable account". I don't think it means it is not US taxable so the significance of that is unknown. The good news is that you do not lose the contribution room and can re-establish your TFSA at any time; i.e. once the situation is clarified. For a simple interest bearing account I would not describe the IRS treatment as "horrible". Depending on the rest of your US tax situation that income may generate no US tax liability at all.

The guiding principal here is don't give the IRS more than it needs to know. Just report the income; if they want more, they'll be in touch.


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## BBCWatcher

For the record, the IRS wants a 3520 in this instance. They're not ambiguous about that. Anything else is not following the IRS's instructions, and I wouldn't recommend that for a variety of reasons. The other options are not necessarily good ones.


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## Nononymous

With TFSAs being excluded from FATCA reporting, you have one less argument for filling out this piece of paper. Provided you are comfortable with not following the letter of the law.


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## maz57

Beg to differ, BBC. Some Canadian TFSAs are trusts and require a 3520. Some are not and don't require a 3520. In my case I asked my financial institution whether my account was a trust; they said no. They should know because they created the product in the first place.

If you have a TFSA which is not a trust and send the IRS a 3520 it just creates a problem where there was none. It's merely an interest bearing savings account which happens to be exempt from Canadian tax. The difference lies in whether the TFSA is a simple deposit account or an investment account which can hold other investment products. If the latter, the investments are held in "trust" for the account owner. If the IRS has specifically ruled ALL Canadian TFSAs require a 3520 please point us to that ruling.


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## cdnynkee

@maz57 - What your Canadian financial institution and the IRS consider as trusts are two different things. The IRS considers it a trust and will handle it that way. 

The advice I was given was to keep my name off of RESPs, mutual funds and TFSAs. My Canadian spouse can have his name on them but I'm to have nothing to do with them.


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## maz57

Everyone will have to make their own choice. That choice will necessarily depend on one's individual tax situation, whether they have US assets, US source income, net worth, comfort level, and so on. It would be a shame to deny oneself a gift from the CRA because of stupid US tax rules. I've stated how I handled it; I suffered no adverse consequences.

I will say this: the IRS' reach into Canada is greatly exaggerated.


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## BBCWatcher

maz57 said:


> ....the IRS' reach into Canada is greatly exaggerated.


By whom? I haven't seen anyone make specific representations in this thread except the opposite.

Then of course there's the question of why compliance with laws and regulations should depend at all on the chances of getting caught. In my experience most people (though not all) are simply ethical, and they act ethically without even considering what it's it for them (i.e. possible penalties). Essentially the same reasons why most people don't litter while alone in the middle of a wilderness, for example.

Is that old fashioned? I don't think so. At least, I hope not.


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## Nononymous

Ah but Canada is filled with dual citizens who don't intend to live in the US and think the IRS should go **** itself (and renunciation is tricky) so there's a great deal of interest in figuring out what one can get away with in terms of non-compliance. Seems perfectly ethical to me.


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## BBCWatcher

No, that would simply be "convenience" and (perhaps) a particular, narrow form of very low personal risk civil disobedience. Being "ethical" happens without regard to personal ramifications. As it happens, most people follow the IRS's instructions even without much (or any) risk of penalty. U.S. tax compliance rates are rather high.

I wouldn't use the word "tricky" to describe renunciation of U.S. citizenship, by the way. It's certainly an option, and I completely support the existence of that right. Every citizen ought to have that option. Usually what people mean by "tricky" is "expensive" (being subject to the exit tax) which isn't actually tricky.

I also support a right for governments to decide, within fairly broad (but not completely unlimited) parameters, how they wish to tax their citizens and/or residents. I've never found a tax code I completely like, and some tax code provisions might be downright foolish from my point of view, but I believe governments ought to have broad latitude in how they tax. Yes, governments ought to have the right to be "foolish" in their taxation policies.


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## maz57

BBCWatcher said:


> By whom? I haven't seen anyone make specific representations in this thread except the opposite.


By the IRS, of course. Threats of massive fines, penalties, and even imprisonment are standard fare. The truth is the IRS has little leverage if one has no US income or assets. 

As for ethics, the tax systems of most countries depend on voluntary compliance. And it works; most taxpayers are basically honest, otherwise those tax systems would collapse. Studies have shown that the IRS is held in low regard by most taxpayers but they continue to file honestly and on time anyway. 

I believe Canadians have a right to have a financial life in Canada without being tripped up by the IRS. I don't see declaring the income of a TFSA on your 1040, paying the resulting tax if due, but skipping the 3520 rigamarole as unethical.

Your example of littering in the wilderness doesn't quite work. A tax system can handle the inevitable few cheats but just one moron can ruin a wilderness experience. Believe me, I know. I often spend my time "out there" picking up trash, but I don't lose any sleep at all over 3520s.


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## Nononymous

I think "particular, narrow form of very low personal risk civil disobedience" sums it up perfectly. Ethical is the wrong word.

What's somewhat particular about our situation here is the number of unwilling/unwitting dual citizens (by accident of birth or parental birth) with no interest in the US, for whom ridding themselves of US citizenship is not entirely straightforward, at least in terms of paperwork obligations; not to mention those admittedly atypical circumstances where lifelong Canadian residents could find themselves owing the US money.

In this case I think non-compliance as civil disobedience is a fine idea. It should be encouraged and supported. (I won't go so far as to defend it as a moral duty.) The risks are currently very low, so it's good fun too. 

But I've said this about a thousand times now, and probably should get off the soap box.


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## maz57

BBCWatcher said:


> Yes, governments ought to have the right to be "foolish" in their taxation policies.


LOL, the US government is certainly exercising that right! The policy is so foolish as to result in widespread non-compliance (I refer to expats, not homelanders); I think I'll just rest my case.


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