I'm Darrin Mish. For 32 years I've practiced federal tax litigation — routine audits, Tax Court cases, and everything in between. If you're facing an IRS issue, here's what you need to know first.
The Question Every U.S.-Canada Taxpayer Asks
Canada and the United States share the longest international border in the world. Money, families, and jobs cross it constantly. Almost every U.S. taxpayer with a Canadian connection eventually asks the same question: are my Canadian accounts foreign trusts under U.S. tax law?
The short answer: most Canadian financial accounts are not foreign trusts. Some are. The classification depends on the account type, not the country.
What U.S. Tax Law Looks For
A foreign trust under U.S. rules requires an arrangement where property is held by one party for the benefit of another, where the trust fails the court test or the control test under IRC Section 7701. The arrangement does not have to be called a trust to qualify.
An ordinary bank account or brokerage account does not meet this standard. The account holder owns the funds directly. There is no trustee holding for a beneficiary. Foreign trust classification does not apply.
This is true for Canadian chequing accounts, savings accounts, GICs, ordinary brokerage accounts, and most TFSAs and RESPs structured as bank deposits or self-directed accounts. They are foreign financial accounts subject to FBAR and (above thresholds) Form 8938, but they are not foreign trusts.
RRSPs and RRIFs: The Clear Case
Registered Retirement Savings Plans and Registered Retirement Income Funds were once treated as foreign trusts for U.S. purposes, generating annual Form 8891 elections and Form 3520-A reporting requirements. This created a reporting headache for tens of thousands of cross-border taxpayers.
Revenue Procedure 2014-55 eliminated the Form 8891 requirement and provided automatic treaty-based deferral of U.S. tax on RRSP accumulations. Subsequent guidance and Rev. Proc. 2020-17 extended exemption treatment to RRSPs for Form 3520 and 3520-A purposes when conditions are met.
For most ordinary RRSP holdings today, you do not file Form 3520 or 3520-A. You do report the account on FBAR if the threshold is exceeded, and on Form 8938 if specified foreign financial asset thresholds are exceeded.
FBAR thresholds are aggregate ($10,000 across all foreign accounts at any point in the year). Form 8938 thresholds vary by filing status and residency, ranging from $50,000 to $600,000 in aggregate specified foreign financial assets.
TFSAs and RESPs: The Harder Case
Tax-Free Savings Accounts (TFSAs) and Registered Education Savings Plans (RESPs) are where Canadian structures and U.S. tax rules collide most painfully.
TFSAs structured as self-directed savings accounts (TFSA savings, TFSA GIC, TFSA cash) function like ordinary bank accounts. They are not foreign trusts.
TFSAs structured as trust accounts under Canadian law – which is common when held at certain investment dealers – have historically been viewed by many U.S. practitioners as foreign trusts. The IRS has not issued definitive guidance specifically classifying TFSAs.
RESPs are typically structured as trusts under Canadian law. The subscriber contributes for the benefit of the beneficiary student. The plan holds investments. This structure looks like a trust under U.S. analysis, and many practitioners treat RESPs as foreign trusts requiring Form 3520 and 3520-A.
Rev. Proc. 2020-17 created a possible exemption for certain “tax-favored foreign non-retirement savings trusts,” which may apply to RESPs and TFSAs that meet the procedural conditions. Eligibility depends on facts including contribution limits, tax favoritism in Canada, and the existence of an information reporting framework.
The PFIC Layer
Even if a Canadian account is not a foreign trust, it may still trigger PFIC reporting. Canadian mutual funds and ETFs are passive foreign investment companies for U.S. tax purposes. A U.S. taxpayer holding Canadian mutual funds or ETFs – through any account – faces annual Form 8621 filings.
The PFIC tax regime is harsh. Default treatment imposes ordinary income tax rates and an interest charge on excess distributions and dispositions. Mark-to-market and QEF elections are available but require ongoing compliance.
For TFSAs and RESPs holding Canadian funds, the PFIC tax can effectively eliminate the Canadian tax preference. Many cross-border families end up holding individual Canadian stocks or U.S.-domiciled funds in their Canadian accounts to avoid the PFIC issue.
The FBAR Question
Almost every Canadian account a U.S. taxpayer holds will be reportable on FBAR. The $10,000 aggregate threshold is low. Two or three Canadian accounts can easily exceed it. RRSPs, TFSAs, RESPs, ordinary bank accounts, and brokerage accounts are all foreign financial accounts for FBAR purposes.
FBARs are filed electronically on FinCEN Form 114 by April 15 with an automatic extension to October 15. The penalty structure is the same as for any FBAR: roughly $16,000 per non-willful violation and the greater of approximately $156,000 or 50 percent of the account balance for willful violations.
The Form 8938 Question
Form 8938 (Statement of Specified Foreign Financial Assets) applies to specified foreign financial assets in aggregate exceeding the threshold for the taxpayer’s filing status and residency. For unmarried U.S. residents, the threshold is $50,000 on the last day of the year or $75,000 at any time during the year.
Canadian accounts count toward Form 8938 thresholds. Most cross-border U.S. taxpayers with substantial Canadian holdings will need to file Form 8938 in addition to FBAR. The forms are not duplicates – they serve different agencies and impose different penalties.
What to Do With the Account Mix
For most U.S. taxpayers with Canadian accounts, three steps make the picture manageable.
First, list every Canadian account and its highest balance for each year. This drives FBAR, Form 8938, and any disclosure-program calculations.
Second, identify which accounts may be foreign trusts (RESPs, certain TFSAs) and evaluate whether Rev. Proc. 2020-17 exemption applies. Documentation of the Canadian trust structure is the starting point.
Third, identify which holdings are PFICs. Canadian mutual funds, ETFs, and certain pooled investment products are PFICs. Form 8621 may be required even for accounts that are not foreign trusts.
If You Have Missed Years
Cross-border families often discover the reporting obligations after years of non-compliance. The Streamlined Filing Compliance Procedures handle most non-willful cases. The Delinquent International Information Return Submission Procedures handle cases with no unreported income.
The path matters. Choosing wrong can cost six figures in penalties that the right path would have avoided.
Talk to Someone Who Handles Both Sides
After 32 years of cross-border tax work, the cleanest outcomes come from analyzing each account individually rather than assuming everything Canadian is the same. Contact the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100. We classify each account, identify available exemptions, and handle catch-up filings when the reporting is behind.