TFSAs, RESPs and RDSPs: U.S. Tax Treatment

For most Canadians, a Tax-Free Savings Account (TFSA), Registered Education Savings Plan (RESP) or Registered Disability Savings Plan (RDSP) is one of the simplest tax decisions they will ever make: contribute, invest, and let the growth compound tax-free. The Canada Revenue Agency does not tax the income earned inside these plans, and qualifying withdrawals are not added to Canadian taxable income. That clean Canadian result is exactly why these accounts are so popular.

The problem begins when the account holder is also a U.S. person — a U.S. citizen, a green-card holder, or someone who otherwise files a U.S. return. The United States taxes its citizens and residents on worldwide income regardless of where they live, and the Internal Revenue Service (IRS) does not recognize the Canadian "tax-free" label. What is tax-free in Canada can be fully taxable in the United States, and the U.S. reporting that comes with these accounts is often more burdensome than the tax itself. Many dual citizens and long-term green-card holders in Canada hold these plans without realizing they have created an annual U.S. compliance obligation.

Why this matters for U.S. persons in Canada

The core issue is a mismatch in how the two countries characterize these plans. Canada treats a TFSA, RESP or RDSP as a tax-sheltered savings vehicle. The United States looks through the Canadian label and asks two separate questions: first, is the income earned inside the plan taxable to the U.S. owner this year; and second, is the plan itself a structure — often a foreign trust — that carries its own information-reporting forms. The answers frequently surprise people who assumed "tax-free" was a universal description.

Because there is generally no Canadian tax paid on the income inside these plans, there is usually no Canadian tax available to claim as a foreign tax credit on the U.S. return. That is the heart of the trap: the same income that escapes Canadian tax can be fully exposed to U.S. tax with nothing to offset it. The reporting penalties for missing the associated international forms can also be significant, sometimes far exceeding the tax at stake.

The mechanics — what each country does

In Canada. Contributions to a TFSA are not deductible, but all investment income and gains inside the account are exempt from Canadian tax, and withdrawals are tax-free and do not affect income-tested benefits. An RESP grows tax-free while invested; government grants and accumulated income are taxed in the student-beneficiary's hands on withdrawal, usually at low rates. An RDSP grows tax-free, and the taxable portion of withdrawals (grants, bonds and growth) is taxed to the beneficiary. The lifetime contribution limit is roughly CAD$50,000 per beneficiary for an RESP and CAD$200,000 for an RDSP; the annual TFSA dollar limit was CAD$7,000 for 2026. These Canadian rules are unaffected by anything the IRS does.

In the United States. The U.S. owner of a TFSA generally must report the interest, dividends and capital gains earned inside the account on Form 1040 each year, as if the account were an ordinary taxable brokerage account. The treaty does not exempt this income (discussed below), so it is taxed at U.S. graduated rates. RESPs and RDSPs raise similar income-inclusion questions for the U.S. person who is treated as the owner of the plan, and the analysis can turn on who is the subscriber, holder or contributor.

Layered on top of the income tax are several U.S. information returns, each with its own threshold and penalty regime:

• Forms 3520 and 3520-A — used when a foreign account is treated as a foreign trust with a U.S. owner. Penalties for late or missing forms can be substantial.
• Form 8621 — required when the account holds a passive foreign investment company (PFIC), which captures most Canadian mutual funds and many Canadian exchange-traded funds.
• FinCEN Form 114 (FBAR) — filed when a U.S. person's foreign financial accounts exceed US$10,000 in aggregate at any point in the year. TFSA, RESP and RDSP balances count toward that threshold.
• Form 8938 — the FATCA "statement of specified foreign financial assets," filed with the income-tax return once higher asset thresholds are met.

The foreign-trust question and Rev. Proc. 2020-17

A persistent debate is whether these registered plans are foreign trusts for U.S. purposes. Many practitioners take the conservative view that an account held in trust — where a trustee holds legal title for the beneficiary — looks like a foreign grantor trust, with the U.S. account holder as owner. That characterization drives the Form 3520 and 3520-A filings, which are among the most penalty-prone forms in the U.S. system.

In March 2020 the IRS issued Revenue Procedure 2020-17, which provides welcome relief from Forms 3520 and 3520-A for certain tax-favored foreign retirement trusts and tax-favored foreign non-retirement savings trusts. To qualify as a non-retirement savings trust, a plan must, among other conditions, be tax-favored under local law, be subject to annual information reporting to the local tax authority, limit contributions to a cap (broadly described as up to US$10,000 annually or US$200,000 on a lifetime basis), and condition withdrawals on the provision of medical, disability or education benefits.

The practical result is important and often misunderstood:

• RESPs and RDSPs generally qualify. They are tax-favored in Canada, are reported to the CRA, have lifetime contribution caps within the stated limits, and are tied to education or disability benefits. A U.S. owner who meets the conditions is relieved from filing Forms 3520 and 3520-A for those plans.
• TFSAs generally do not qualify. The relief for the non-retirement category is tied to plans whose contributions are limited to amounts earned from personal services or that fit the medical, disability or education framing — and a TFSA, which accepts contributions regardless of earned income and serves general savings, typically falls outside the safe harbor. Many advisors therefore continue to take a protective filing position for TFSAs that are structured as trusts.

Two cautions are essential. First, Rev. Proc. 2020-17 relieves only the information-reporting obligation on Forms 3520 and 3520-A; it does not exempt the income earned inside the plan from U.S. tax. Second, the relief does not touch the FBAR, Form 8938 or PFIC (Form 8621) obligations, which continue to apply on their own terms. Individuals previously assessed a Form 3520 penalty for a now-qualifying plan may be able to request abatement or a refund using Form 843.

How the Canada-U.S. tax treaty interacts

The Canada-United States Income Tax Convention is what makes RRSPs manageable for U.S. persons. Article XVIII allows a U.S. person to elect to defer U.S. tax on the undistributed income of an RRSP or RRIF until it is withdrawn, mirroring the Canadian deferral, and the IRS has streamlined that election so it is now largely automatic. That treaty deferral is the reason RRSPs are usually the cross-border-friendly choice. We discuss the downstream side of that relationship in our guide to RRSP distributions for U.S. residents.

The TFSA, RESP and RDSP do not share that protection. The TFSA was introduced in 2009, after the treaty's pension provisions were last meaningfully updated, and the IRS has not extended Article XVIII deferral to it; there is no comparable election to defer U.S. tax on TFSA, RESP or RDSP growth. The treaty's general rules on residence (Article IV) and the foreign tax credit and elimination-of-double-taxation mechanism (Article XXIV) still apply, but where Canada imposes no tax on the income there is simply nothing to credit. In short, the treaty narrows double taxation on retirement plans but leaves these savings plans largely exposed to current U.S. tax.

Common traps

Assuming "tax-free in Canada" means "tax-free everywhere." The most common mistake is treating the Canadian label as decisive. A U.S. person who maxes out a TFSA over many years can accumulate years of unreported U.S. income and unfiled forms without ever owing a dollar of Canadian tax.

Overlooking PFICs inside the account. A TFSA, RESP or RDSP invested in Canadian mutual funds or ETFs almost always holds PFICs. The PFIC rules in Form 8621 can convert ordinary growth into income taxed at the highest rates plus an interest charge, and they apply even where the Form 3520 relief is available. This is one of the strongest reasons U.S. persons are often counseled to favor U.S.-domiciled holdings or individual securities rather than Canadian pooled funds inside these plans.

Confusing income tax with reporting relief. Rev. Proc. 2020-17 is genuinely helpful, but it is narrow. Relying on it as if it eliminated the underlying tax — or as if it applied to TFSAs — is a frequent and costly error.

Forgetting the FBAR and Form 8938. These accounts count toward the US$10,000 FBAR threshold and the higher Form 8938 thresholds regardless of how small the income is. Non-willful FBAR penalties can apply even where no tax is owed.

Missing the divergence in characterization between spouses or family members. An RESP subscribed by a non-U.S. spouse, or a plan where contributions and ownership are split, can change who the IRS treats as the owner — and therefore who must report. The facts of each family's arrangement matter.

How Barrett Tax Law approaches TFSA, RESP and RDSP U.S. treatment

Barrett Tax Law's cross-border practice is led by Simone Barrett, who is admitted in Ontario and in Florida and works on both sides of the border. We start by confirming who the IRS treats as the owner of each plan and mapping every account against the relevant forms — income inclusion on Form 1040, the foreign-trust questions on Forms 3520 and 3520-A (and whether Rev. Proc. 2020-17 relief is available), PFIC exposure on Form 8621, and the FBAR and Form 8938 thresholds. From there we identify which holdings are creating the worst U.S. outcomes, model whether restructuring the investments inside the plan would reduce PFIC drag, and weigh whether the plan still makes sense for someone who files U.S. returns. Where past years were missed, we assess whether the Streamlined Filing Compliance Procedures or another correction path fits the facts, and we coordinate the Canadian and U.S. filings so they tell a consistent story. We invite you to book a free, confidential consultation to review your registered accounts before the next filing deadline.

These plans rarely sit in isolation. We routinely align this analysis with broader planning — see our cross-border tax overview, our work on FATCA and FBAR compliance, and our guidance for new Canadian residents and those facing departure tax on a move out of Canada. For families with mixed citizenship, our note on cross-border estate planning explains how these accounts fit into the larger picture, and you can always start at our cross-border tax hub.

A practical sequence

For a U.S. person already holding these plans, a workable order of operations is usually: (1) determine ownership and income inclusion for each account; (2) confirm whether Rev. Proc. 2020-17 removes the Form 3520/3520-A obligation for the RESP and RDSP; (3) inventory the underlying investments for PFICs and decide whether to simplify them; (4) bring FBAR and Form 8938 filings current; and (5) where there is a history of non-filing, choose a compliance path before the IRS contacts you. Doing this proactively almost always produces a better result than waiting for a notice.

The right answer also depends on where you are in your cross-border life. Someone who has just become a U.S. resident faces different choices than a long-time dual citizen or a Canadian planning a move south. Our overview of year-one planning when becoming a U.S. resident and our cross-border move tax checklist walk through how registered accounts should be addressed at each stage.

This page is general information, not legal or tax advice. The U.S. treatment of TFSAs, RESPs and RDSPs depends on the specific facts — including your citizenship and residence, who owns and contributes to each plan, what the plan holds, and the interaction of Canadian and U.S. rules — and the law and IRS guidance can change. You should obtain advice tailored to your situation before acting.