“USA Citizens” and The RESP/TFSA Battle

Is anyone else sick of dealing with bureaucratic machines that are absolutely terrible at what they are trying to accomplish? To catch a few of you up, I am one of the million or so Canadian citizens that has been residing in Canada and paying my fair share of taxes for my entire life, yet has been told I have to file a ridiculous amount of paperwork on a yearly basis because I was born in the USA. My significant other and extended family are in the same boat. To understand some of the details read this background piece on the trials and tribulations of trying to become aware of my supposed duties as an American citizen check this out.

A Screw Up So Bad Only a Bureaucrat Could Love It

I actually am kind of fascinated by the incredible gong show that this whole ordeal has turned into for the IRS. Can you imagine the huge cost in manpower and resources that the IRS is going to need to go through these filings, as well as to enforce their new FATCA rules on Canadian banks? Now think about the fact that the vast majority of Canadian/American citizens are just like me and owe no taxes. Who in the world would take out Canadian citizenship as a tax haven move? It makes no sense at all. Does the IRS really think that anyone with enough wealth to try to hide it in Canada won’t simply find another place to hide it altogether? Billionaires have the means to hire lawyers and accountants to switch their citizenship to something more advantageous while making up BS reasons why they did so, or else find untraceable tax havens and loopholes all around the world. Their own Presidential candidate has dozens of foreign bank accounts and paid an effective tax rate of 14.7% for crying out loud! So ultimately one has to conclude that the big fish the IRS is chasing they have almost no hope of ever catching, while at the same time they induce the costs of having to process hundreds of thousands of “0 rated” tax forms that are pretty complicated. The only people that are actually making money here are the super high in-demand tax specialists that have taken $3,000 from my uncle, $1,400 from my dad, and $300 from me (and I did the majority of my own paper work – after several hours of frustration). What a waste.

USA citizenshipJust to give people some idea of the ridiculousness that this has on your life besides the obvious stomach punch that is paying high fees to an accountant to prepare a tax return that says you don’t owe anything, I thought I would look at two great Canadian programs that my citizenship impacts. Both RESPs and TFSAs are very cool financial tools that Canada allows citizens to use as a means of encouraging savings. While the US and Canadian governments have worked out a sort of hands-off reciprocal treaty concerning RRSP and 401K accounts, the same cannot be said for RESPs and TFSAs. If you want to use these financial vehicles in Canada and you have to file a USA tax form, get ready for the incredibly complicated world of income trusts. Since those accounts are not really income trusts they don’t fit into the bureaucratic conundrum that is the USA tax code. Just writing this gets me incredibly frustrating since no American in their right mind would use a TFSA to hide money from the American government!

My “Crazy” Simple Compromise Proposal

I imagine that the IRS has some smart people working for it. Logic tells me that with that many people with degrees in the same organization someone must have some original ideas that don’t suck. While I disagree with the principle of what is going on, I am also a practical person. Hey, you tax collectors want a tool to go after tax evaders, I get it. I technically could enjoy the benefits of living in the USA if I chose, and I can also vote for President if I want to, so I have almost wrapped my head around filing taxes. But is there no freakin way you could make this a little simpler? From my experience the majority of tax preparers that think they know how to do this stuff in Canada have no idea, and every person I talk to in my situation has been told something radically different by the IRS when they called. It is utter insanity. Is there no way the IRS couldn’t put 3 really smart people in the same room and create a 1 page document specifically aimed at the million Canadian citizens/Canadian residents that pay taxes in Canada every year, yet have to file a US tax report? Wouldn’t this save millions and millions of dollars in manpower, as well as not incur the wrath of a million people?!

How hard would it be to create a basic document that asked people in my situation the following questions (obviously all gussied up in lawyer-speak):

Name
Social Security Number
Identification of All Bank Accounts Used
Do You Owe Any USA Tax?
If Yes, How Much?

I presume this would give the IRS what it needed to go after the tax cheats. I mean if you don’t identify your account, that should be it right? Even if some of us had investment income that didn’t fall under current regulations, I’m sure there are enough exemptions and tax credits available that it would cancel out almost all of us. Instead they force Canadian citizens who design their personal financial situation and financial vehicles to fit Canadian rules, into the complex web of the same US tax filing sheet that everyone else uses. It doesn’t take a genius to figure out there is going to be a ton of unnecessary headaches there.

Any Bets On What The End Result Be?

The end result of this will not be anything other than mass confusion, insane penalties for law-abiding citizens, absolute fear of approaching the USA border for many Canadians (and you silly American tourist businesses thought you would benefit from our strong dollar), and wasted time on so many levels. Incredibly frustrating in so many ways. Oh ya, I’m sure all those congressional representative we get will be sure to bring our concerns up (we don’t get to vote for congress). I would love to renounce my citizenship, but unfortunately that would cost me hundreds of  dollars more, dozens of more hours of stupefying paperwork, and I would likely be harassed every time I went through the border crossing to visit my family in the USA (which is often).

Sorry for the pity party. Anyone else out there dealing with this stuff, and can anyone point me to specific resources (free ones) that explain how their dual-reporting responsibilities have impacted their investment decisions?

13 Comments

  1. badger on July 30, 2012 at 12:10 pm

    You might want to have a look at this website where many dual Canadian/US citizens, Canadian green card holders, snowbirds, and other duals living outside the US (many of us born abroad) are trying to figure this situation out. It is very complex, and so we’ve been pooling our efforts.

    Several have been researching various parts of this issue, and lobbying in the US and Canada to assist those caught up in the pain of being claimed as a taxpayer by the US, in addition to where we live, earn (and were born) – Canada, UK, Switzerland, Brazil, etc.

    Here are a few of the threads that are very Canada specific:

    isaacbrocksociety.ca/2012/…and-fbars/

    isaacbrocksociety.ca/2012/…-on-fatca/

    isaacbrocksociety.ca/2012/…bmissions/

    isaacbrocksociety.ca/2012/…tion-site/



  2. Teacher Man on July 30, 2012 at 3:21 pm

    Thanks Badger. I have been there before, and I’ve read the threads, but so far there isn’t too much case precedent on what the IRS is going to do right? It’s definitely a valuable resource though, thanks for point it out to readers.



  3. badger on August 20, 2012 at 2:20 pm

    Here is an interesting paper about the ability of the IRS to enforce judgements under FBAR and FATCA in Canada. Doesn’t help with your TFSA question I know, but interesting because of the Canadian legal and constitutional context. I’m not endorsing the Mopsick webpage below, just providing the link to the paper brought to attention by ‘Tim’.

    See the comments by Tim, on this page mopsicktaxlaw.blogspot.ca/2012/…earch.html :
    “Tim August 17, 2012 8:40 PM

    “Very good article in Canadian Tax Journal on Canadian specific issues related to FATCA and FBAR. One problem before today I was not aware of is beyond everything else discussed already some of the information requested of FFI’s like account balances is information Canada Revenue cannot even request of Canadian financial institutions on Canadian tax payers.”

    www.ctf.ca/ctfwe…dde8c018a2



  4. badger on August 20, 2012 at 2:22 pm

    P.S, not offering up the paper citation as definitive last word on subject, or as advice. I don’t have any credentials, training, or experience to advise – just searching about for good information, and weighing options like everyone else in this morass.



  5. Teacher Man on August 20, 2012 at 3:52 pm

    Thanks Badger. I had read something similar before. My problem really isn’t that I’m worried the Canadian government will enforce USA tax claims, but rather that when I cross into the USA to see friends and family there will be problems.



  6. Ben on January 29, 2013 at 10:13 am

    Thanks for the post – I’m just in the process of figuring this out myself. I moved to Canada in 2000, got my Canadian citizenship in 2008 and for all intents and purposes am Canadian. My family is still in the U.S., but haven’t earned a cent of income in the US since 1999.

    Now, with the impending birth of my first kid, this RESP bit is like a kick to the stomach. Taxation without representation much, US?

    Of course, my immediate reaction was “renounce my US citizenship”, but apparently that comes with it’s own problems, least of which is harassment at the border.

    Not sure how I’m going to handle all of this, but appreciate the resources shared here.



  7. Teacher Man on January 29, 2013 at 7:29 pm

    Make sure and check out my other articles on the topic Ben. Although, I should point out, technically it is not taxation without representation because we can still vote for President. You should see what a hassle it is to renounce. Crazy.



  8. Dean Paley, CPA, CGA on June 6, 2015 at 6:25 am

    In my humble opinion the income from the TFSA can be reported normally on schedules B & D albeit a pain because there may be no tax slips. The RESP is a massive hassle because it would require forms 3520/3520-A be filed.

    Mutual funds outside of RRSP/RRIF plans are also a minefield with the PFIC filing requirements.

    The big kick is the FBAR forms. Those are highly invasive



  9. Kyle on June 6, 2015 at 12:12 pm

    Agreed Dean. Do you see any sort of Canadian-specific treaty on the horizon that would exempt the filing requirements for so many of us? I would think drafting a very simple form to fill out for Canadians who do not owe any tax would save the IRS a ton of time and money?



  10. Paul on August 13, 2015 at 4:51 pm

    I knew about the TFSA things, but you’re saying that my kids, being dual citizens may have to pay taxes on their RESPs?



  11. Kyle on August 13, 2015 at 11:05 pm

    Here’s the really frustrating thing – it’s almost for sure they won’t actually owe any taxes. BUT they will have to file annoying paperwork every single year until they are done school. In fact, if you have already opened RESPs for them without filing the income trust paperwork (the USA definition of an RESP) you are technically violating tax laws. Sorry to be the bearer of bad news!



  12. George on April 11, 2017 at 7:21 pm

    So, in the end, does anyone know if the TFSA requires 3520 or not? I have been told yes and no numerous times!



  13. Kyle on April 17, 2017 at 2:10 pm

    It absolutely does George. There have been rumors of changing that, but as of today the answer is definitely yes.



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