U.S. citizens or holders of green cards living in Canada might be tempted to open a tax-free savings account. But opening a TFSA might result in more trouble than it’s worth. While the U.S. recognizes the tax-deferred status of RRSPs, it does not do likewise for TFSAs.

“The RRSP is treaty-protected, so owning one just becomes a matter of disclosure and reporting [to the IRS],” says Ryan Carey, a cross-border tax advisor in Toronto.

The TFSA, on the other hand, is viewed by the U.S. government as a foreign trust. “If I’m a U.S. citizen, and I open a TFSA in Canada,” Carey says, “the IRS looks at it in the same way as if I set up an offshore trust in, say, Barbados to try to shelter a bunch of income.”

Not only is all income generated in the TFSA subject to U.S. tax, but there is also a great deal of reporting and disclosure related to a U.S. citizen owning a TFSA. Says Carey: “My general advice to the average American living in Canada is not to have a TFSA. And if you have opened one, close it.”

But TFSAs might make sense for wealthy Americans living in Canada. That’s because taxes are almost always lower in the U.S. than in Canada. “You’re subject to something like 30%-35% in the U.S., but you’re avoiding 46.41% in Ontario, for example. So, there’s still tax savings there by using the TFSA,” Carey says.

In such cases, the reporting burdens of a TFSA might be worthwhile.

— RUDY MEZZETTA