If you are a U.S. citizen or green card holder and you live in Canada, you need to report your worldwide income to both the Canada Revenue Agency (CRA) and the U.S. Internal Revenue Service (IRS). Worldwide income includes any money you earn in your investment accounts.
For dual citizens, the tax treaty between the U.S. and Canada makes things more complicated when choosing between investment account types. Below, we’ve outlined which account types you should consider avoiding and which are OK to use.
Investment accounts to avoid as a US person
Tax Free Savings Account (TFSA)
Many tax experts would advise U.S. citizens to avoid investing in a TFSA because it is not considered a tax-sheltered account by the IRS. If you invest using a TFSA as a U.S. citizen, you won’t get to enjoy the tax-free benefits because all your investment gains will remain taxable when you file taxes in the U.S.
In addition, you may have additional filing costs when reporting your TFSA and any associated income.
What should you do instead of opening a TFSA? If you’ve already maxed out your RRSP (see below), you can save extra cash in a non-registered personal account.
Registered Educational Savings Plan (RESP)
Similar to TFSAs, U.S. citizens should typically avoid opening RESPs. The IRS considers any income earned in an RESP, including government grants such as CESG and CLB, as taxable income.
If a member of your family is not a U.S citizen and isn’t subject to the country’s tax rules, they can set up and contribute to an RESP without needing to pay taxes on the income in the U.S. This remains true even if your children are U.S. citizens.
Investment accounts to use as a US person
Non-Registered (Personal) Accounts
Non-registered accounts don’t have any special tax advantages, so they are a good option for dual citizens.
However, there is one important thing to be aware of: as a general rule, you may wish to avoid investing in Canadian-listed ETFs in your non-registered accounts.
The U.S. government considers most Canadian-domiciled mutual funds and ETFs to be Passive Foreign Investment Companies (PFICs). As a U.S. citizen, you must make special filings to report these holdings to the IRS. These can be complicated, and paying a tax expert to do it can be expensive. If this applies to you, consider making an appointment with one of our advisors to discuss the pros and cons of an alternative portfolio construction.
Registered Retirement Savings Plan (RRSP)
Through the Canada-U.S. tax treaty, RRSPs are recognized as tax-advantaged accounts for retirement. You can open an RRSP account without worrying about tax implications on any income you earn.
Another benefit: unlike your non-registered accounts, you can keep all of your Canadian-listed ETFs and mutual funds inside your RRSP. If you currently have an RRSP as a dual citizen, you can file an election under the Canada-U.S. Income Tax Treaty to defer the income earned in your RRSP or RRIF for U.S. federal tax purposes so that it parallels the treatment for Canadian tax purposes.
There are some complexities however. Contributions to an RRSP can be used to reduce your Canadian income, but not your U.S. income. For most people, Canadian taxes will be higher than U.S. taxes, so an RRSP contribution is likely to reduce their Canadian taxes, but not below the level of their U.S. taxes. If, however, you contribute enough to your RRSP that your Canadian taxes owed are lower than your U.S. taxes owed, you may have a residual tax owing to the IRS.
If you are a U.S. citizen living in Canada, it’s important to remember that your circumstances might be unique, so each situation should be reviewed by a tax specialist proficient on both sides of the border.