Can I keep my TFSA if I move to the US?

What Canada does when a TFSA holder becomes a non-resident

Canada leaves the account alone. A TFSA belonging to a non-resident keeps growing tax-free under Canadian law, withdrawals stay tax-free, and the account is not part of the deemed disposition that hits your other investments on departure. Three Canadian rules do change, and each is easy to trip over:

• No new room. Contribution room stops accumulating for every year you are a non-resident of Canada, starting with the year after you leave.
• A 1% monthly tax on non-resident contributions. Any amount you contribute while non-resident is taxed at 1% for each month it stays in the account. The tax runs until you withdraw the contribution, and it is reported on Form RC243.
• Withdrawals are added back, but frozen. Amounts you take out while non-resident are added to your room the following January, yet you can only use that room if you become a Canadian resident again.

Tell your TFSA issuer the date you ceased to be resident. Automatic contribution plans are the usual source of the 1% penalty, because nobody remembers to turn them off.

Why the US treats your TFSA as an ordinary taxable account

The Canada-US tax treaty protects RRSPs and RRIFs with an election that defers US tax on the growth until withdrawal. There is no equivalent for the TFSA. From the day you become a US resident, the account is simply a foreign investment account in the eyes of the IRS:

• Interest and dividends earned inside it are reported on your Form 1040 in the year received.
• Capital gains are taxed when a holding is sold, measured from your US-dollar cost basis. Growth before your US residency start date is not taxed by the US, so you need a valuation on that date.
• The account is a foreign financial account for the FBAR (FinCEN Form 114) and counts toward the aggregate US$10,000 threshold, and it may need to appear on Form 8938 as well. Our FBAR guide covers both forms.
• Canadian mutual funds and Canadian-listed ETFs held inside it are PFICs, each requiring its own Form 8621 with punitive default tax treatment.

The foreign-trust question is the one that divides practitioners. Most TFSAs are set up as trust arrangements, and a foreign trust with a US owner normally requires Forms 3520 and 3520-A each year, with penalties that start in the thousands of dollars for late filing. IRS Revenue Procedure 2020-17 exempts certain tax-favoured foreign savings trusts from those forms, and many advisers take the position that a TFSA qualifies. As at the time of writing the IRS has not confirmed that reading specifically for TFSAs, so a decision to skip the 3520 filings should be made deliberately and documented, not assumed.

The practical case for collapsing the TFSA before you leave

Once the account produces US tax every year and adds several information returns to your file, the shelter has stopped sheltering anything. Withdrawing everything while you are still a Canadian resident costs no Canadian tax, produces no US tax on the growth to date, and removes every one of the filings above from your future US returns. That is why the standard advice is to empty the TFSA before your US residency begins.

Timing is the detail people miss. Your US residency start date under the substantial presence test is generally your first day of presence in the US in the year you meet the test, which can be earlier than your moving day. A TFSA collapsed the week after you arrive has already produced a sliver of US-taxable income. Do it before you cross, and keep the closing statement as proof of the balance on that date.

There is a second, non-tax reason. Canadian banks and brokerages are restricted by US securities rules in dealing with US residents, and many respond by freezing the account to sells only, refusing new purchases, or asking you to close it. Policies differ by institution, so ask yours in writing before you move rather than discovering the restriction when you try to rebalance.

When keeping the account can still make sense

Keeping the TFSA is reasonable when the move is temporary, for example a two-year assignment or a TN position with a firm plan to return. The Canadian room is preserved, and the US tax cost of holding simple assets is modest. If you go that route, three habits keep it clean:

• Hold individual stocks, GICs or cash rather than Canadian funds, so no PFIC filings arise.
• Record the US-dollar value of every holding on your residency start date, since that becomes your basis for US purposes.
• Stop every contribution, and confirm the issuer has your non-resident status on file.

The RRSP decision is different and usually points the other way, because the treaty deferral makes it a workable account to hold from the US. We explain both accounts side by side in what happens to my RRSP and TFSA when I leave Canada, and the broader exit checklist in our departure tax guide. US citizens already living in Canada face the same account issue from the other direction; that version is covered in is a TFSA taxable in the US.

How we handle TFSAs in a departure plan

We treat the TFSA as a decision to make before the move, not a problem to report after it. In a departure engagement we fix the likely US residency start date, model the US tax on keeping versus collapsing the account, and if the answer is to withdraw, we schedule it ahead of the crossing and record the closing values. For clients who keep the account, we set up the FBAR and Form 8938 disclosures and take a documented position on the foreign-trust forms rather than leaving it to chance. Our cross-border tax services page describes how the departure return and the first US return are prepared together.

Source: CRA — RC4466, Tax-Free Savings Account (TFSA) Guide for Individuals.