I'm moving to Canada and I have an HSA. Can I keep it?

You can keep the HSA. Nothing in IRC 223 forces you to close it when you leave the country, and the money stays yours. What you lose is the ability to contribute (that requires a qualifying high-deductible health plan, and a Canadian provincial plan isn’t one) and, on the Canadian side, the tax-free treatment. Canada doesn’t recognize the HSA as anything special. The CRA taxes the investment income inside the account every year, the US-Canada treaty doesn’t cover it, and the account may be classified as a Canadian-resident trust. The US side doesn’t change: qualified medical distributions stay US-tax-free, and the balance continues growing US-tax-free. But once you’re a Canadian resident, that US benefit comes with a Canadian cost that runs every year you hold the account.

Why can’t I contribute to the HSA after I move?

IRC 223(a) allows a deduction for contributions made by an “eligible individual.” IRC 223(c)(1) defines that as someone “covered under a high deductible health plan” on the first day of the month, who is not also covered by another health plan that isn’t a high-deductible plan, who is not enrolled in Medicare, and who can’t be claimed as a dependent on someone else’s return.

A Canadian provincial health plan (OHIP, MSP, RAMQ, etc.) is not a high-deductible health plan under IRC 223(c)(2). It’s comprehensive first-dollar coverage with no deductible, which is exactly what disqualifies it. Once you’re enrolled in a provincial plan, you’re no longer an eligible individual, and contributions stop.

Two timing points:

• Eligibility is tested monthly. IRC 223(b)(1) measures the deduction limit by the number of months you’re eligible. Move mid-year and you get a partial-year contribution limit.
• The last-month rule under IRC 223(b)(2) can allow a full-year contribution if you’re eligible on December 1, but it comes with a testing period that requires you to stay eligible for the following 12 months. Fail the testing period and the excess contribution is included in income with a 10 percent penalty under IRC 223(b)(8).

The practical result: in the year you move, prorate the contribution to the months you were still HDHP-covered. After that, the account stays open but no new money goes in.

Does Canada recognize the HSA’s tax-free status?

No. There is no provision in the Income Tax Act that gives a US health savings account any preferential treatment. The CRA treats the HSA as a foreign investment account, and all interest, dividends, and realized capital gains earned inside the account are taxable in Canada each year.

This is the same pattern as a 529 education savings plan and a TFSA going the other direction: each country’s domestic tax-advantaged accounts are not recognized by the other country unless the treaty specifically covers them. The treaty covers pensions, RRSPs, IRAs, 401(k)s, and Roth IRAs. It does not cover HSAs, 529s, TFSAs, or RESPs.

When you become a Canadian tax resident, your Canadian cost in the HSA resets to its fair market value on the date you establish residency (converted to Canadian dollars), which prevents Canada from taxing growth that accrued while you were a US resident. But everything earned from that day forward is taxable in Canada annually.

Does the treaty protect the HSA?

No. Article XVIII of the US-Canada treaty covers “pensions,” defined in paragraph 3 as payments under “a superannuation, pension or other retirement arrangement, Armed Forces retirement pay, war veterans pensions and allowances, and amounts paid under a sickness, accident or disability plan.” The 2007 Fifth Protocol added Roth IRAs by reference to IRC 408A.

An HSA is not a pension or retirement arrangement. It’s a health savings vehicle. The “sickness, accident or disability plan” language in the treaty is about benefit payments under an insurance arrangement, not a savings account the individual controls. Some practitioners have argued that the HSA should fall under this language, but no competent authority agreement, CRA technical interpretation, or court decision has confirmed that reading. Until one does, the safe position is that the treaty does not cover HSAs.

The result is a genuine cost, not a timing difference. Canada taxes the HSA’s investment income each year. The US never taxes it (because the account is tax-exempt under IRC 223(e)(1)). There’s no US tax on the same income for a foreign tax credit to offset, so the Canadian tax is a net addition.

Could the CRA classify my HSA as a Canadian trust?

The same risk that applies to a 529 plan applies here. An HSA is structured as a trust or custodial account under IRC 223(d)(1). If the account holder lives in Canada and directs the account’s investments and distributions, the CRA can apply the “mind and management” test under Income Tax Folio S6-F1-C1 to treat the trust as factually resident in Canada, or ITA section 94 can deem it resident if you’re a “resident contributor.”

If classified as a Canadian-resident trust, the income retained inside the HSA is taxed at the top marginal rate rather than your personal rate, and a T3 Trust Income Tax and Information Return must be filed. No published CRA ruling specifically addresses HSAs under these rules, so the risk is based on general principles rather than a confirmed position.

Do I have to report the HSA on Form T1135?

If the total cost of all your specified foreign property exceeds $100,000 CAD at any time during the year, the HSA balance counts toward that total. Most HSAs are well under $100,000, so the T1135 question usually turns on your other foreign holdings rather than the HSA alone. The threshold runs on cost (which, after the immigration reset, is the arrival fair market value in Canadian dollars), measured across all specified foreign property. For the full T1135 mechanics: T1135 and late-filing routes.

What happens when I use the HSA for medical expenses?

The US treatment doesn’t change after you move. Qualified medical distributions remain excluded from US gross income under IRC 223(f)(1), whether the medical expenses are incurred in the US or Canada. The list of qualified expenses is in IRC 213(d) and includes most medical, dental, and vision expenses.

The Canadian treatment is less clear. The distribution comes out of an account that Canada treats as a foreign investment, and how the CRA characterizes that payment depends on what’s being distributed (a return of your original contributions, investment income, or a mix) and whether Canada has already taxed the income component in a prior year. If the investment income was reported and taxed annually on your Canadian return, the same money shouldn’t be taxed again when it comes out, but matching the pieces requires tracking what’s been reported. There’s no standard CRA form or procedure for this, which is part of the compliance cost.

Non-qualified distributions (amounts used for something other than medical expenses) are included in US gross income and carry a 20 percent penalty under IRC 223(f)(4) if you’re under 65, unless you’re disabled or the distribution is made after death. After age 65 the penalty drops away and the distribution is taxed as ordinary income, making the HSA function like a traditional IRA at that point.

Should I use up the HSA before I move?

It depends on whether you have medical expenses to spend it on. If you’re sitting on unreimbursed qualified expenses from your US years, paying them from the HSA before you move is the cleanest path: the distribution is US-tax-free, Canada has no claim (you’re not a Canadian resident yet), and the balance drops, reducing future Canadian reporting.

If you don’t have current expenses but expect future ones, keeping the account open preserves the US tax-free withdrawal for medical costs down the road. The trade-off is the annual Canadian tax on the growth and the compliance cost of tracking it.

If the balance is small (under a few thousand dollars), the ongoing Canadian reporting cost may exceed the tax-free benefit. Spending it on qualifying medical expenses before the move eliminates the problem.

What should I do next?

Before the move: tally your unreimbursed qualified medical expenses and decide whether to draw the HSA down. If you’re keeping it, note the fair market value on the date you establish Canadian residency (converted to Canadian dollars), because that’s your Canadian cost basis. After the move: report the investment income on your Canadian return each year, include the balance in your T1135 total if it pushes you over the threshold, and use the account for qualifying medical expenses when they come up.

There’s a step-by-step HSA checklist for the move, with the before-and-after sequence in one place, and you can have it emailed to you from that page. If the HSA is one piece of a larger move, the full checklist is in moving back to Canada from the US. For the registered accounts that do have treaty protection (RRSP, Roth IRA, 401(k)): what happens to your RRSP and TFSA when you move. For the 529 plan, which faces the same treaty gap: what happens to a 529 when you move to Canada.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.