Published on May 12, 2020 | Updated on December 18, 2023
by Deborshi Choudhury
Deborshi Choudhury, an IRS Enrolled Agent with 15 years of expat tax experience, specializes in US tax preparation, tax planning and tax advice for US citizens and Green Card holders living and working in Canada.
U.S. citizens and residents can legally create foreign trusts. Transactions from these and from any other worldwide income must be taxed in the U.S. according to the tax laws. If they fail to declare these on their tax filing, there are consequences in the form of penalties.
However, for many Canadians who have Registered Education Savings Plan (RESP) or Tax-free Savings Account (TFSA) plans and live in the U.S. there may be no need for them to file the necessary 3520 0r 3520-A forms annually. These tax-free investment plans are popular in Canada and are used for tax free general savings (TFSA) or for post-secondary education (RESP). The Canadian government also contributes yearly toward the child’s education within a RESP plan.
Renate and Deborshi are both tax experts at Expat US Tax and between them have decades of taxation experience. They help to clarify some of the confusion that has arisen about what the responsibilities of the holders of these types of tax-free savings accounts are.
All Americans living in Canada, Green Card Holders, and Canadians who live in America need to understand the tax law and how to file their tax returns for income from foreign trusts. For Canadians, it is frustrating trying to find out when they need to file 3520 and 3520-A if are holders of a TFSA or a RESP.
Recently, in March 2020, the new revenue procedure known as 2020-17 was released and offers interesting changes for US citizens and residents, especially Canadians.
Who needs to file form 3520?
Any resident or U.S. citizen that meets the following criteria:
- Earns or transfers currency or property from a foreign trust.
- Receives contributions from such a trust, whether directly or indirectly.
- Is a US owner of a foreign trust.
- Gets money from a bequest or as a gift from a foreign entity.
Who needs to file form 3520-A?
Every owner, even a partial one, of a foreign trust who is a citizen or resident of the U.S. needs to complete and file this form. It must include all information about the trust and its U.S. beneficiaries.
Understanding the Rev. Proc. 2020-17
Rev. Proc. 2020-17 has two main parts that affect Canadians living in America. The first part includes foreign retirement plans and not relevant to Canadians because the procedure guidelines for reporting them were laid down in the past and there are mostly problem free.
In the second part, the new revenue procedure offers some relief to Canadians with RESPs and non-retirement savings trusts. They have been offered relief from filing forms 3520 and 3520-A to the IRS. It all depends on the purposes for having set up a RESP and most people qualify for the relief. Of course, this relief depends on the purpose for having set up a non-retirement savings trust in the first place and pertains to those funds that have been set up for future medical disabilities or education.
In Canada, 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.
I want to know more about US taxes abroad
Which criteria need to be met for Canadians to be exempt?
There are 5 criteria that these residents need to know and they must meet all of them before they stop submitting 3520 and 3520-A forms.
- These accounts need to be tax exempt or tax favored accounts in the country where the trust is held. Some Canadian non-retirement savings accounts only pay taxes when the money is removed by the beneficiary and they offer tax savings on the growth of the investment.
- It is essential that these accounts are reported to the Canadian tax authorities annually and lifetime contribution limits are also checked to ensure that they have not been surpassed.
- If these amounts exceed the limits set, then foreign trust forms must be filed.
- If a withdrawal has been made from a trust, it is tax exempt only if the money was used for the specific purpose that the trust was set up. The money from a trust set up for the secondary education of a dependent cannot be used to add an extension to a home.
How do taxpayers benefit from these measures?
First, they need not worry about filing the 3520 and 3520-A forms annually and they also save on the cost of having someone fill them in correctly.
What happens to those people who received penalties in the last two years?
Incorrectly filled in 3520 and 3520-A forms and non-filing of these resulted in many penalties which were sent out to taxpayer in the past two years. Renata reassures that there is some relief for those who were thus penalized in the current revenue procedure. That is part of the work that tax experts like Deborshi and she are trained to help people with and can advise on how to qualify for a return.
What happens to people who have never filed these forms in the previous years?
Those who have never filed before and meet the criteria set by the IRS need not file for the previous years and people who were diligently filing can also stop.
Why people still need to submit the forms for TFSAs?
Most TFSAs are general savings accounts, failing to meet the criteria set down by the revenue procedure that requires them to be savings with a specific purpose. They need to specifically have been set up for a secondary education or disability.
A lot of the confusion surrounding the filing of 3520 and 3520-A forms has finally been clarified and the new procedure has relieved thousands of people from having to worry about these forms.
Contact us at Expat US Tax if you need your questions answered or need any clarification about your specific non-retirement savings trust.