A US person (i.e. citizen or green card holder) living in Canada that is considering opening a FHSA should be aware of the US income tax treatment of this account prior to opening.
The IRS has not provided any commentary with respect to the US tax treatment of FHSA accounts. However, in the absence of such guidance they would likely be treated similarly to other Canadian accounts like the TFSA and RESP as follows:
- The account would be treated as a regular investment account for US tax purposes and any income earned (i.e. interest, dividends, capital gains) within the accounts would likely be considered taxable to US persons on their US tax return.
- If the account holds certain investments such as Canadian mutual funds or ETF’s, the investments will likely be subject to the US PFIC reporting requirements. Therefore, these investments within the FHSA should be avoided for US persons.
- Depending on the structure of the investment holdings, if the account was administered by a trustee there could also be IRS Foreign trust (Form 3520/3520A) filing requirements.
- The account would be reportable on the US taxpayer’s annual foreign financial account disclosure forms (i.e. FBAR and 8938).
- The contributions would not be deductible for US tax purposes which may or may not result in an additional tax liability on the US tax return depending on the individuals tax bracket and available foreign tax credits.
- Raymond James will prepare 1099 slips for US persons to report the income in USD within a Raymond James held FHSA, to ease clients with reporting on their US tax returns.
Therefore, if the client is considering opening an FHSA account careful planning by a cross-border tax accountant would be needed to ensure the correct filing position is taken for US tax purposes and if it makes sense to open the account based on the individual client’s overall US and Canadian tax liabilities.
There are additional tax implications that Canadian residents who open a FHSA account should be aware of if they open a FHSA in Canada and then later become non-residents of Canada for tax purposes. The CRA guidelines for non-residents of Canada holding a FHSA are as follows:
- If you become a non-resident of Canada after you open your FHSA, you can continue to participate normally in your FHSA and any amounts contributed based on your existing contribution limit will continue to grow tax free.
- As a non-resident, you would not be eligible to make a qualifying withdrawal to buy or build a qualifying home while you are a non-resident of Canada. The CRA guidelines specifically state that you must be a resident of Canada throughout the period that begins with the date of the first qualifying withdrawal and ends with the date of acquisition of the qualifying home.
- As a non-resident of Canada, any taxable withdrawal from a FHSA will be subject to a 25% withholding tax in the year of withdrawal. The withholding tax may be reduced if the country where you reside has a tax treaty with Canada which allows for a lower withholding rate.
- Any distributions received from a deceased holder’s FHSA as a beneficiary will also be subject to the withholding tax.
- Clients should consider their FHSA rollover options to their RRSP or RRIF before they cease Canadian tax residency to avoid any potential tax consequences in their new home country as the FHSA plan income may be considered taxable outside of Canada.
Note the rules for non-resident holders of FHSA accounts would apply to all former Canadian tax residents, regardless of their citizenship or US status. Clients should always ensure they discuss the tax treatment of their FHSA income and withdrawals with a tax accountant of their resident country.