Comparing a TFSA vs. RRSP vs. RDSP vs. RESP vs. Non-Registered Account
There are various types of investments Canadian can make to save for retirement or other life events. But for Canadian taxpayers who are also considered U.S. persons for tax purposes, the IRS tax treatment of those Canadian investments can be much different than the CRA tax treatment in Canada — especially for Tax-Free Savings Accounts (TFSAs). Likewise, the taxpayer may have several U.S. international reporting requirements for their foreign investments, which can make tax compliance feel daunting. Let’s review five (5) common investment schemes in Canada and how they may receive tax and reporting treatment in the United States.
TFSA (Tax-Free Savings Account)
A TFSA is a Tax-Free Aavings Account. It is somewhat similar to an IRA in that certain deferrals can be made under Canadian law to defer money into the TFSA. Moreover, the investment generally grows tax-free in Canada, although there are some exceptions, exclusions, and limitations. Unfortunately, the TFSA does not receive tax-deferred treatment in the United States, so income generated in the TFSA can be taxable even though it was not taxed in Canada. Likewise, depending on the type of assets in the TFSA and the value can determine which international information reporting reforms are required. Some of the more common forms are the FBAR, Form 8938, and Form 8621.
RRSP/RRIF (Registered Retirement Savings Plan)
The RRSP is a registered retirement savings plan and is also very common in Canada. It more closely resembles the 401K and receives tax-deferred treatment in the United States as well. Typically, income is not taxable until it is distributed, and about ten years ago, the IRS elimnated the requirement to make an annual 8891 election. The RRSP is typically reported on the FBAR and Form 8938 but is exempt from Form 3520/3520-A reporting and will typically qualify for the pension exception to Form 8621.
RDSP (Registered Disability Savings Plan)
The RDSP is a Registered Disability Savings Plan and is an effective savings vehicle under Canadian law. Unfortunately, from a U.S. tax perspective, the RDSP does not typically receive tax-deferred treatment. Taxpayers who are considered U.S persons for tax purposes would typically receive a 1099 or equivalent from the investment itself and that income is then reported on the US tax return. International reporting for the RDSP is similar to the TFSA.
RESP (Registered Education Savings Plan)
The RESP is a Registered Education Savings Plan In Canada which is used to help taxpayers save for education costs down the line. Unfortunately, the United States does not provide tax-deferred treatment for the RESP either, and therefore income can be taxable even if it has not been distributed. If there are mutual funds or other types of ‘pooled funds’ in the RESP, it may lead to PFIC as well.
Non-Registered Account
A non-registered investment account accounted as similar to opening an investment account at a typical brokerage in the United states such as Schwab or Vanguard. There is there is generally no tax deferred treatment on non registered accounts so income is reportable and if taxes have been paid in Canada the taxpayer may qualify for a foreign tax credit. The IRS international reporting requirements are similar to the TFSA.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs. Prior Year Non-Compliance
Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.
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