Although the investment income earned in a TFSA is tax-free for Canadian tax purposes, “this tax free status” does not apply to U.S. residents. As a U.S. taxpayer you are required to file U.S. returns annually and any income earned in a TFSA during the year is taxable.
Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.
The IRS may consider TFSAs offered in trust-type arrangements to be foreign grantor trusts. Thus, if the RESP or TFSA contributor (grantor) is a US citizen, all interest, dividends, and capital gains on the amount invested must be reported annually for US tax purposes.
Any Canadian resident at the age of majority or older with a valid social insurance number (SIN) can open a TFSA. There is no limit on when or how much you can withdraw from your TFSA. Generally, any amount you contribute and any income earned in a TFSA is tax free, even when withdrawn.
Unfortunately, TFSA contributions can't be used to lower your taxable income. This means there is no way to decrease your income tax when contributing to a TFSA. For high income earners this makes an RRSP more appealing.
Withdrawing funds from your TFSA does not reduce the total amount of contributions you have already made for the year. Withdrawals, excluding qualifying transfers and specified distributions, made from your TFSA in the year will only be added back to your TFSA contribution room at the beginning of the following year.
The short answer is that a TFSA is taxable in the United States and it is reportable on several different international reporting forms. But, depending on what assets are contained within the TFSA a may impact the extent of the reporting required.
Account status: Your TFSA maintains its tax-free status in Canada, even if you become a non-resident.
The main difference with a TFSA is that although you don't get a tax break when you contribute, you would not pay any capital gains tax to the Canada Revenue Agency (CRA) when money is withdrawn. Despite the name, tax-free savings accounts do more than what savings accounts can do.
Most TFSA holders have no tax payable related to their TFSA investments, and no TFSA tax return has to be filed.
It also means that starting on January 1, 2025, eligible Canadians will now have a cumulative lifetime TFSA contribution limit of $102,000 (see “What is the lifetime contribution limit for TFSA?” below for examples and charts).
Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn. Administrative or other fees in relation to a TFSA and any interest on money borrowed to contribute to a TFSA are not tax-deductible.
Taxes on U.S. stocks in a TFSA
U.S. stocks held in a TFSA are subject to 15% withholding tax on U.S. dividend income. Withholding tax would apply to other foreign stocks held in a TFSA, with rates starting at 15%, depending on the country.
Personal Bank Accounts
If you decide to move back to America after time spent overseas, you may transfer the funds from your foreign bank account to your American bank account. Since this isn't income and is simply moving around your money, you won't have to pay taxes on the transfer.
TFSA earnings are subject to U.S. income tax. You must include any earnings from your TFSA as taxable income on your U.S. income tax return, and a direct foreign tax credit cannot be recouped as there is no Canadian tax incurred on them. Special filing requirements apply to specific investments.
It's important that you tell the CRA the date you leave Canada. Generally, as a non-resident, you are not eligible to receive: the GST/HST credit. the Canada child benefit (CCB) (including those payments from certain related provincial or territorial programs)
Assets in your TFSA are not subject to departure tax, and earnings in the account, as well as withdrawals, will still be tax-free for Canadian tax purposes. However, you will not be allowed to contribute to your TFSA while you're in the U.S.; no contribution room will accrue while you are a non-resident of Canada.
Reporting Obligations: You must report your RRSP on the FBAR and potentially on Form 8938, depending on your foreign financial assets' total value. Withdrawals Are Taxable: Distributions from your RRSP are taxable in the U.S., but you can often offset this with foreign tax credits for Canadian taxes paid.
If you turned 18 after 2009, your contribution room started the year you turned 18 and then began to accumulate. Your TFSA contribution room grows every year even if you don't file a tax return or open a TFSA. If you aren't earning income, you can still contribute to your TFSA.
With a TFSA, you have more flexibility than with a Roth IRA. With a TFSA, you can take money out whenever you like without penalty. But with a Roth IRA, you need to have held the account for at least five years and be 59.5 or older not to be subject to tax on the earnings in the Roth IRA or to face a penalty.
It's wise to withdraw money from your TFSA versus other savings accounts, because taking money from your TFSA isn't taxed and it allows you to delay withdrawing from your Registered Retirement Savings Plan (RRSP) — which would be taxed.
If you've always contributed the maximum amount into your TFSA, the most you can put in is $7,000 for 2024. But if you never contributed before and turned 18 in 2009 or earlier, you may be able to contribute up to $95,000.
In Canada, you're not taxed simply for holding funds in a bank account. Rather, you're taxed on earnings generated from bank account deposits. So, there is no limit to the amount of money you can have in your bank account without being taxed in Canada.