IRS taxation of RESP & TFSA post Revenue Procedure 2020-17

Oct 7, 2022

Good morning,

I am Olivier Wagner. I have been operating 1040 Abroad since 2012. I’m an enrolled agent and a New Hampshire CPA.

Today, I will discuss Canadian financial products, which are RESPs and TFSAs.

While these financial products are tax-free in Canada, they are not tax-free in the USA, which might make them unsuitable to US citizens living in Canada.

Registered Education Savings Plan (RESP)
An RESP is created by parents to fund the university education of their child.
The Canadian government provides various benefits to encourage using that investment vehicle.

If the child does not attend university by a certain age, the funds can revert to the parent; for that reason, it is a grantor trust (as opposed to a non-grantor trust).
An RESP is a grantor trust. Income is to be reported by the grantor, the parent sponsoring the RESP.  A grantor trust typically needs to file forms 3520 & 3520-A, although an exception applies.

Tax-Free Savings Account (TFSA)
A TFSA allows Canadian residents to save in a tax-free account, meaning that they are not taxed in Canada on the investment income earned within that account.
This status doesn’t extend to the US, and they would be taxed in the US without the ability to use a foreign tax credit.

Revenue Procedure 2020-17
As per Revenue Procedure 2020-17, starting in March 2020, the IRS no longer requires the filing of form 3520 for foreign tax-deferred trusts.

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