Do I need to file IRS Forms 3520 and 3520-A for my TFSA and RESP?
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The short answer is… not if you only have an RESP. The new IRS Revenue Procedure 2020-17 issued in 2020 basically stops all Foreign Trust reporting of RESPs… GREAT NEWS!
If you have a TFSA, then the answer is maybe.
There are 3 types of TFSA. The only TFSA that may need to be reported as a Foreign Trust on Forms 3520 and 3520-A are those set up as an “Arrangement In Trust”.
It is not illegal for U.S. citizens and residents to create a foreign trust or have transactions from one, but they must be taxed on their worldwide income. However, there are tax consequences if they fail to declare these or to meet their filing responsibilities. Failure to meet these results in penalties, and they aren’t small.
U.S. citizens and Green Card holders in Canada and Canadians who live in the U.S. can hold RESP or TFSA savings plans which are tax-deferred investment plans. These investment plans are popular and can be used for general savings (TFSA) or for post-secondary education (RESP), to which the Canadian government also contributes yearly toward the child’s education.
Americans living in Canada, Green Card Holders and Canadians crossing into America need to understand how the filing of foreign trust returns affects them. It is often very frustrating knowing when they need to file 3520 and 3520-A if they have a tax-free savings account (TFSA) or a Registered Education Savings Plan (RESP). The new revenue procedure known as RevProc 2020-17 was released in March 2020 offers interesting changes for US citizens and residents, especially Canadians.
Renate and Deborshi both specialize in US-Canadian tax and have decades of experience between them. They are part of the team at Expat Tax Online and helped to clarify any confusion that holders of these types of Canadian savings accounts might have.
What is the new Rev. Proc. 2020-17 all about?
There are two parts to the new revenue procedure. Foreign “non-US” retirement plans are the first part and it is not too relevant to Canadians who have already been following the procedure guidelines laid down in the past for reporting them. The procedures are straight forward and have not caused much confusion.
The second part is more exciting because U.S. citizens, Green Card holders, and Canadian’s in the U.S. with RESPs and non-retirement savings trusts from Canada will now have relief from filing Form 3520 and 3520-A to the IRS. This is a big deal and will save lots of money and time every year. It all depends on the purposes of having set up the RESP and most people qualify for the relief. The purpose of having set up a non-retirement savings trust can offer relief, especially if it has been set up for medical disabilities or education.
The money that accumulates from the various investments within a TFSA is tax-free even when withdrawn, whereas the money from RESP is taxed on withdrawal.
Important criteria that exempt U.S. tax filers from filing Forms 3520 and 3520-A
All 5 criteria below must be met by U.S. tax filers before they stop filing 3520 and 3520-A forms, and these include:
- Tax-exempt or tax-favored treatments in the trust’s country are the first requirement. In Canada, non-retirement savings trusts qualify for tax savings until the money is removed for the beneficiary.
- Annual reporting to the Canadian government is a requirement and the annual or lifetime contributions limits are also checked.
- However, there is an annual contribution limit for TFSAs of $10,000 or $200,000 over the lifetime limit. Deborshi explained that RESP contributions have changed since 2006 when the annual limit was $4,000 and a $42,000 lifetime limit. The new lifetime limit has been increased to $50,000 dollars per beneficiary since 2007 and there are no annual limits.
- Any amounts exceeding these thresholds must file foreign trust returns.
- Any withdrawals from these trusts must have been used for the purpose that the trust was formed. An example is a withdrawal from an RESP that must be used for educational purposes. If the money is used for home improvements or for any other purpose there is a penalty from the trust.
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What does this mean for U.S. tax filers?
Those taxpayers that qualify for relief from filing these forms are relieved of the related costs and having to worry about them annually.
What about people who never filed these forms previously?
People who were previously filing these forms can stop filing them if they meet the above criteria, but even those who have never filed before don’t need to file for the previous years.
Are there any provisions for the people that were penalized in the past?
Over the last two years the IRS sent out a lot of penalties for incorrect and non-filing of 3520 and 3520-A forms. Renate points out that current revenue procedure also allows for some relief for those who were penalized and these people should approach someone who knows about the tax law to help relieve them these penalties.
What about TFSAs. Do people have any relief from filing the forms?
This revenue procedure doesn’t normally qualify TFSAs under the non-retirement savings trust. The reason is they are just tax-free savings account and do not have a specific reason for saving up in them e.g. specifically for disability or education. They are general savings accounts and fail the first criteria on the list. The tax experts at Expat Tax Online can offer advice on how to proceed with these.
This new information about when it is necessary to file 3520 and 3520-A forms is very useful and clarifies some of the confusion around.
Who is required to file form 3520?
Any US citizen or resident who:
- Transfers or earns money or property from a foreign trust.
- Directly or indirectly receives distributions form such a trust.
- Is considered as a US owner of a foreign trust.
- Receives from a bequest or gift from a foreign entity.
Who is required to file Form 3520-A?
This form requires that all information is included about a foreign trust, its U.S. beneficiaries and any person from the U.S. who is an owner, even partially, of a foreign trust.
Contact us at Expat Tax Online to find out some of the general rules around the new revenue procedure and see if you meet the criteria for not fling and 3520 or 3520-A.
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