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Form 3520/3520A Filing Requirement Regarding Canadian Tax-Favored Accounts

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Form 3520/3520A Filing Requirement Regarding Canadian Tax-Favored Accounts


As a US taxpayer, navigating the intricate world of international tax reporting is essential to ensure compliance with the IRS regulations. One question that often arises is whether Canadian Tax-Favored Accounts such as RRSP, RESP, and TFSA need to be reported on Forms 3520 and 3520A. In this article, we’ll dive into the details of the reporting requirements and provide clarity on this matter.

Understanding different types of Canadian Tax-Favored Accounts

  • RRSP (Registered Retirement Savings Plan):
    • Tax implication: Contributions are tax-deductible, reducing taxable income.
    • Tax Growth: Investments grow tax-deferred within the account.
    • Tax Withdrawal: Withdrawals are taxed as regular income.
  • RESP (Registered Education Savings Plan):
    • Tax implication: No immediate tax deduction for contributions.
    • Grant Benefit: Government matches a portion of your contribution and investment growth is tax-deferred.
    • Tax Distribution: Withdrawn funds include contributions (non-taxable), grants (taxed at student’s rate), and gains (taxed at contributor’s rate).
  • TFSA (Tax-Free Savings Account):
    • Tax implication: Contributions are not tax-deductible.
    • Tax Growth: Investments grow tax-free within the account.
    • Tax-Free Withdrawal: No taxes on withdrawals, the contribution room is restored for future use.

Understanding Form 3520 and 3520A related to Canadian Tax-Favored Accounts

Form 3520 and Form 3520-A are IRS forms used to report foreign financial interests. They are related to foreign trusts and large gifts from foreign sources.

Form 3520:

  • Used for reporting transactions with foreign trusts and significant foreign gifts.
  • If you’re involved with a foreign trust (like foreign inheritance or contributions), report on this form.
  • Similar to reporting transactions with foreign trusts, RRSP, RESP, and TFSA transactions could be relevant if they involve foreign elements.

Form 3520-A:

  • Filed by foreign trusts with U.S. owners or beneficiaries.
  • Trusts with U.S. owners or beneficiaries must report trust activities and income attributed to U.S. persons.
  • Maybe related to RRSP, RESP, or TFSA if they involve a foreign trust structure.

Understanding Rev. Proc. 2020-17 and How It Impacts the Reporting of Canadian Tax-Favored Accounts in the US.

The revised procedure carries greater significance as it offers notable changes. U.S. individuals and Canadians residing in the U.S. possessing tax-favored accounts from Canada will now find relief from the obligation to file Form 3520 and 3520-A with the IRS. This change has substantial implications, potentially resulting in significant savings of both money and time on an annual basis.

Eligibility for this relief is contingent on the purpose behind establishing these tax-favored accounts, and in most cases, individuals qualify for the exemption. Moreover, relief is attainable for non-retirement savings trusts, particularly if they are designated for medical disabilities or educational purposes.

It’s important to note that while funds accruing within a Tax-Free Savings Account (TFSA) remain tax-free upon withdrawal, funds from an RESP are subject to taxation upon withdrawal.

What are the conditions that must be met by Canadians to qualify for exemption?

There are several specific criteria that Canadian residents must be acquainted with and satisfy all of them before they can discontinue the submission of Form 3520 and Form 3520-A.

  • The fundamental prerequisite is that these accounts must hold a status of tax exemption or tax-favored. Certain Canadian non-retirement savings accounts, for instance, only incur taxation when the beneficiary withdraws the funds, offering tax advantages on the growth of the invested capital.
  • Moreover, it is crucial that these accounts are annually reported to the Canadian tax authorities, and careful consideration is given to the cumulative contribution limits to ensure they haven’t been exceeded.
  • Should these limits be surpassed, it becomes necessary to file foreign trust forms.
  • Additionally, the exemption depends on whether the funds were utilized for the intended purpose for which the trust was initially established. For instance, if a trust was specifically set up for a dependent’s higher education, the funds cannot be allocated to activities such as home improvements.

Other Reporting Requirments:

While tax-favored accounts may not be subject to Forms 3520 and 3520A reporting, U.S. taxpayers with these Canadian accounts may still have reporting obligations. They may need to be reported on your individual U.S. tax return, specifically on Form 8938 (Statement of Specified Foreign Financial Assets) or Form 114 (FBAR) if they meet the reporting threshold.

It’s important to understand that not reporting foreign financial assets when required can lead to penalties. Therefore, even though TFSAs don’t fall under Forms 3520 and 3520A reporting, accurate reporting on other applicable forms remains essential.

Contact Us Today

Ensure accurate reporting of your financial assets by working with us today. Our team is well-versed in the complexities of cross-border tax regulations and can provide you with the guidance needed to secure correct reporting and compliance. We offer a variety range of services including tax filing, tax planning, compliance assessment, guidance on Form 3520, 3520A, 8938, 114, etc. If you need help with any of these, please feel free to contact us below.

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