There is a lot of frustration surrounding filing foreign trust return forms 3520 and 3520-A for those who have a TFSA or an RESP.
The IRS have introduced a new revenue procedure, 2020-17, what does it help with in this situation?
This procedure has the potential to be very helpful for Canadians. There are two parts to this revenue procedure; the first part deals with foreign retirement plans, and that is less relevant to Canadians because there has been a lot of guidance and decisions made about Canadian retirement plans in the past, and there is not a lot of burdensome reporting for those.
However, the second part of this revenue procedure is more exciting, because one of the things Canadians or people with Canadian RESPs (Registered Education Savings plans), have been dealing with, is recording them as foreign trust to the US. The second part of this revenue procedure looks specifically at foreign trusts, that are non-retirement savings trusts. They look for certain criteria, and once that is met, these particular trusts no longer have the burdensome filing requirement of forms 3520 and 3520-A.
Is this a blanket rule now?
Does this apply to everyone with a TFSA or a RESP, or is it limited to certain people?
Who does get relief from the trust filing requirements?
Most people who have a RESP meet the criteria found in the 2020-17 revenue procedure, so individuals who have those specific non-retirement savings trusts will have relief from the trust filing requirements. An important fact that needs to be looked at is what the purpose of the non-retirement savings trust is. It has to be set up for specific reasons in order to qualify for this exemption. Some of the eligible reasons include medical, disability, or education. This is where the RESPs come in; there is some more specific criteria as well, which we will later see the RESPs fit in to.
Something else which should be looked at is whether or not there is a tax exempt or tax favoured treatment in the country the trust is set up in. A Canadian RESP will qualify for a tax-favoured non-retirement savings trust, and because these plans are tax-favoured, the money that is contributed to the RESP will be exempt from income tax, until it is removed to pay for the beneficiary’s education.
Does this includeeveryone who has a TFSA?Are there any other criteria that need to be met?
Yes, so under the first criteria it does include most people with a TFSA, however there are more requirements that must be met. Another requirement is that there must be annual reporting to the Canadian government, which is met by TFSAs. Another important point which must be looked at is the annual or lifetime contribution limits. This is where many other non-retirement savings trust fail to meet the criteria. The current criteria in place for non-retirement savings trusts are limits of $10,000 annually, or $200,000 over a lifetime.
For RESPs, the limits are slightly different. Until 2006, the annual contribution limit for a RESP plan was $4,000 and the lifetime contribution limit was $42,000. In 2007, it was changed so there were no annual contribution limits, and the lifetime contribution limit was raised to $50,000 per beneficiary. There are some RESP plans which are designed for families, where more than four named beneficiaries can exceed the total $200,000 USD lifetime contribution limit. However, under certain circumstances, such as if you exceed the contribution limit, it is still likely the RESP will need to be disclosed on US foreign trust returns.
Are there any more criteria to meet?
There is one more requirement; the withdrawals, distributions, or payments that come out of the trust have to be for the specific purpose for which that trust is set up. For RESPs, it has to be for educational reasons, and if not, there has to be an imposed penalty for withdrawing the money for a reason other than for the purpose of education as in this example. If you were to withdraw the money for any other reason, you would still be allowed to do this, however the trust has to impose a financial penalty in this situation, so you would not get all the money from the trust.
If you meet these criteria, can you stop filing forms 3520 and 3520-A if you have been doing that previously?
Even if you have not been filing forms 3520 and 3520-A when you maybe should have,
can you continue to not file if you now meet the criteria in the revenue procedure?
That is correct. There are also provisions in the revenue procedure 2020-17 for individuals who may have been penalised in the past for late filing of forms 3520 and 3520-A, so they have set out relief for these prior penalties. The IRS sent out several $10,000 USD penalties in the last few years, and the new revenue procedure can help with those situations. If you are in a situation where you have those penalties, it is important to look through this revenue procedure to see what the IRS are doing to help.
This procedure clearly helps those people who have RESPs, does it help those with TFSAs in a similar way,
especially for those getting caught by the foreign trust filing requirements of forms 3520 and 3520-A?
This particular revenue procedure does not necessarily help those with a TFSA, as it does not qualify under the non-retirement savings trust. The non-retirement savings trust must have a specific purpose (such as education, medical or disability), which TFSAs do not, so it would not meet the first criteria. The IRS does not have any other specific guidance on how TFSAs should be treated, however there are various different views out there. If there is any uncertainty,itwould certainly be worth getting in contact with us and having a conversationabout your particular situation with your TFSA or RESP, and how this guidance might apply to you.