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TFSAs are best avoided, RRSPs can work for you, and other financial wisdom
Q. I am a dual Canadian/U.S. citizen. Due to this, I cannot make use of a TFSA, so once my RRSP is maxed out, I’m stuck with non-registered accounts. I plan on putting a large part of my savings into a U.S. robo-advisor or U.S.-listed ETFs. As for my RRSP, I was wondering whether I should focus on Canadian ETFs to diversify my already U.S.-heavy portfolio? – O.
A. More than any other country, the U.S. keeps its expatriates on a short leash. If you’re a U.S. citizen, you’re generally considered a U.S. person for tax purposes, even if you have never lived on American soil. And as such, you may be required to file regular reports with the IRS regarding your investment holdings. With this in mind, O., dual citizens such as yourself should seek professional advice from a specialist in cross-border tax issues. I can only offer some general guidelines here.
First, you’re wise to avoid using a TFSA. While Canada and the U.S. have a tax treaty that generally harmonizes the way pensions and retirement accounts are taxed, this does not cover Tax-Free Savings Accounts: if you’re a U.S. person, investment gains earned within a TFSA are taxable in the U.S. That’s why most experts agree that dual citizens should not open a TFSA at all. (By the way, they should also avoid RESPs.)
The second point to understand is that U.S. persons in Canada need to be careful when investing in non-registered accounts. The U.S. government considers most Canadian-domiciled mutual funds and ETFs to be Passive Foreign Investment Companies, or PFICs, and the income from these investments may be subject to higher taxes. For this reason—as you suggest, O.—it may be better to use U.S.-listed ETFs in your non-registered account.
As for investing with a robo-advisor based in the U.S., I doubt whether that is possible. Most U.S. investment dealers will not allow you to open an account if you are not a resident. (The two largest robo-advisors, Betterment and Wealthfront, are explicit about this.) So you will likely need to hold your investment accounts in Canada and do your best within the limits we’ve described above.
Let’s consider a couple of ideas that will allow you to build a diversified portfolio while staying in the IRS’s good books.
One strategy, as you suggest, is to keep all of your Canadian stocks and bonds inside your RRSP, where you can use mutual funds or ETFs listed on the Toronto Stock Exchange.
When your RRSP is maxed and you need to open a non-registered account, you can use it to hold foreign equities with U.S.-listed ETFs. I would suggest keeping this account as simple as possible: consider using an all-in-one solution such as the Vanguard Total World Stock ETF (VT), which holds more than 8,000 stocks in some 40 countries for a ridiculously low fee of 0.10%.
If you need to hold some fixed income in your non-registered account to keep the portfolio in balance, you could use GICs or high-interest savings products, neither of which are considered PFICs, so they would not require additional reporting.
The rules affecting U.S. citizens in Canada are complex, O., and the consequences of non-compliance can be high. So before you build your portfolio, seek professional advice to make sure you don’t attract unwanted attention from the IRS.
Dan Bortolotti, CFP, CIM, is an associate portfolio manager and financial planner with PWL Capital in Toronto.
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Is those market linked GIC considered as PFIC ?
As a US tax preparer, I too used to recommend that US clients think twice before having a TFSA as it is considered a trust and has Form 3520 and Form 3520-A that need to be completed for US tax filings. However, you need to consider what it costs to complete those forms and how much tax you potentially could pay in the US compared to the tax savings in Canada. Now that you can invest around 60,000 if you can make over 1200 per year, then the TFSA is appropriate. Rules changed in March 2020 around RESP and RDSP plans so they are no longer required to file those forms. In response to Andrew, PFICs must meet two tests – income and asset tests. If the investment is a flow through then it is most often a PFIC.
What would be the issue of holding Canadian stocks in the open investment account and if a person uses the TFSA account and only buys U.S. stocks and just submits a spread sheet to their U.S. account with any gains, dividends and distributions could they not just file with this and if you had to pay tax on the U.S. side would it not be worth it?
Thanks for the question. Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
I am US/Canadian Dual citizen living in Canada. I just received a small US inheritance. Currently the money is sitting in a US checking account in Florida. I do not want to complicate US or Canadian taxes. Would it be better to open a savings or investment account in United States and leave the money in the US?
I would like to keep things simple. What would you suggest?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with a qualified advisor.
I opened a TFSA account for my dual citizen spouse 5 years ago. My spouse has no income and deposited the inheritance into the TFSA maxing it out and every year since. I file FBAR,WEN and 1040NR reporting the dividend gains as income every year. You don’t need an accountant! The gains (C$12000/yr) are less that the minimum earnings for paying taxes to the IRS, <~US$21k.TD bank doesn't issue 1099DIV for TFSA accounts. Upon retirement the TFSA will be progressively depleted to $0 below the min IRS earnings.
Each year I have 5 tax returns to file. My spouse’s, mom’s, and my CRA; and then my spouse’s and my joint IRS, and my mom’s IRS.
No, I don’t file TFSAs as trusts, never had, and now since 2020 there is a IRS service bulletin clarifying that no they probably aren’t in most circumstances. I have always reported all dividends, interest, and capital gains on the TFAs and have used 3 different accounting firms since 2010. I have no recollection of anything before 2010.
Also.. for my mom, extremely rare to owe the IRS anything, so her TFSA has not hurt her. For my joint return, most time I owe the IRS for US dividend taxes, and had some high income years that there was no way around some tax, but my plan was to contribute to TFSAs until the point were they started to negatively affect tax. Haven’t seen it yet.
Now true, like other reportable accounts (anything not an RRSP) one must be careful of what investments are made. Generally I avoid PFICs but not always. Each situation is different, and a good accounting firm won’t slack you too much for the form.