If you are a U.S. citizen living in Canada, you are required to report your worldwide income on a US income tax return in addition to your Canadian income tax return.
As a result, it is important to be aware of the US income tax consequences of your investment and savings strategies.
The Tax Free Savings Account (TFSA) was introduced in 2009 to offer Canadians a unique and flexible planning opportunity to save for their financial goals.
Although income earned in a TFSA grows tax free for Canadian income tax purposes, the income earned in a TFSA is considered to be taxable income for US income tax purposes, in the year that it is earned.
While the US income tax implications of a TFSA may deter U.S. citizens from investing in a TFSA, the determination of whether a TFSA is actually beneficial from an overall tax standpoint should be determined on a case by case basis.
Example
For example, the TFSA may be a beneficial savings vehicle for U.S. citizens residing in Canada who have foreign (such as Canadian) taxes payable on other non-US investment income (held outside of a TFSA), as the foreign taxes payable on that other non-U.S. investment income may be applied to offset some of the US income tax attributable to the TFSA income.
In addition to the US income tax issues, US citizens should consider the US foreign (non-U.S.) reporting and/or disclosure requirements when evaluating the feasibility of investing in a TFSA, ideally with the assistance of their cross-border tax advisor.
More information
For more information on potential U.S. income tax issues for U.S. citizens residing in Canada, ask for a copy of the publication U.S. Citizens Living in Canada – Income Tax Considerations.
Submitted by Sandy Brennan, Associate investment advisor, Newton Eastwood Duetrich Wealth Advisory Group
