The Tax-Free Savings Account - What if You Are a US Citizen?

Author:  Warren Smith, CA, TEP, Principal, Segal LLP Chartered Accountants

 

The Tax-Free Savings Account (TFSA) was implemented on January 1, 2009, and is a great vehicle in which to earn tax-free investment income.

We have many clients that are US Citizens and their tax filings are always a bit more complicated because of the need to file a US tax return each year.  If you are a US citizen residing in Canada, you likely are not surprised that the IRS is still going to tax you on the investment income earned inside the TFSA.

If you have other Canadian-source investment income, it is unlikely the investment income from the TFSA will create a tax liability  in the  US  in the short term.  This is because the maximum contribution to the TFSA for 2010 is $5,000, so the investment income earned will likely not be material unless you have realized a significant capital gain.  Furthermore, the tax paid on other investment income in Canada will likely provide sufficient foreign tax credits to offset any US tax liability.  In later years, when the balance inside your TFSA has increased, you may need to pay closer attention to this matter.

We do not expect the financial institutions to issue a T5 or other income slip showing the investment income earned in the TFSA, so you need to remember to review your account statements and provide this information to your accountant.  Failure to report income from your TFSA on your US tax return may result in penalties.

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