Is a TFSA a Foreign Trust? Do I Really Need Form 3520?

There’s no definitive answer, because the IRS has never ruled on TFSAs specifically. Many TFSAs are set up as an arrangement in trust. For those, the conservative read treats the account as a foreign trust, and that means Form 3520 and Form 3520-A every year. Since 2024, proposed US regulations let you skip both forms if the account never tops $50,000 and you’ve been reporting its income. Above that, you’re choosing between two defensible positions, and this guide prices both.

Why does the IRS treat a TFSA like a foreign trust in the first place?

Because Canadian law built it that way. Under section 146.2 of the Income Tax Act, a TFSA can legally be one of three things: an arrangement in trust, an annuity contract, or a deposit. Plenty of bank and brokerage TFSAs are the trust kind. Your account paperwork says which.

US law is blunt about it. Under the tax code’s definition, any trust outside US-court supervision and US-person control is a foreign trust. A Canadian TFSA trust fits that description exactly. And the Instructions for Form 3520 require a filing from any US person “treated as the owner of any part of the assets of a foreign trust.” You put the money in, you control it, and you can pull it out tomorrow. That reads like ownership.

What’s missing is a ruling saying TFSAs do or don’t count. RRSPs had the same problem. The IRS eventually carved them out by name (Rev. Proc. 2014-55). The TFSA never got that.

What does filing Form 3520 and 3520-A actually involve?

Two extra filings a year for one savings account. Form 3520 is your side, due on “the 15th day of the 4th month following the end of such person’s tax year” (Instructions for Form 3520). Form 3520-A is the trust’s own return, due “by the 15th day of the 3rd month after the end of the foreign trust’s tax year,” so March 15 for a calendar-year TFSA (Instructions for Form 3520-A).

Your Canadian bank has no idea Form 3520-A exists and won’t be filing it. So the US owner “must complete and attach a substitute Form 3520-A” to their own Form 3520. The burden lands on you or your preparer; we broke down what this filing actually costs separately.

What is the penalty if you skip the forms and the IRS disagrees?

It starts at $10,000, and that’s the floor. Per the Instructions for Form 3520, the initial penalty is “the greater of $10,000 or” an applicable percentage. In practice that means 35% of distributions you failed to report, or 5% of the trust assets treated as yours when no Form 3520-A gets filed (Instructions for Form 3520-A). On typical TFSA balances the $10,000 floor is the number doing the damage. The forms are annual, so a multi-year miss stacks.

Penalties like these are why every firm defaults to “file to be safe.” Fair enough, but the safe answer has its own annual bill.

Did Rev. Proc. 2020-17 exempt TFSAs?

On a plain reading, no, though it gets cited as if it did. Rev. Proc. 2020-17 exempts “an eligible individual’s transactions with, or ownership of, an applicable tax-favored foreign trust” from section 6048 reporting. But it defines only two qualifying categories, and a TFSA fits awkwardly in both:

• The retirement category requires that “only contributions with respect to income earned from the performance of personal services are permitted.” TFSA contributions aren’t tied to earned income.
• The savings category covers trusts operating “exclusively or almost exclusively to provide, or to earn income for the provision of, medical, disability, or educational benefits.” A TFSA is general-purpose. You can spend it on a boat.

Some preparers still argue a TFSA in. The argument isn’t frivolous, but nothing from the IRS backs it. And the ruling is explicit that it “does not affect any reporting obligations under section 6038D” or “the requirement to file FinCEN Form 114,” so FBAR and Form 8938 stay whatever you decide.

What changed with the 2024 proposed regulations?

In May 2024, Treasury issued proposed regulations (REG-124850-08). They carry the Rev. Proc. 2020-17 exemptions into formal rules and add a third category: the tax-favored foreign de minimis savings trust. That’s the law’s name for a small-account exemption. The test has three parts. The account is tax-favored where it lives. The local tax authority gets annual reporting on it. And “the aggregate value of the trust(s) in the trust’s jurisdiction is limited to no more than $50,000 at any point during the taxable year,” measured in US dollars.

The proposed regulations never name the TFSA or any country’s account. A small trust-form TFSA fits the description, but nothing says so out loud. And you don’t have to wait for final rules, because “a taxpayer may rely on these proposed regulations for any taxable year ending after May 8, 2024,” applied “in their entirety and in a consistent manner.”

There’s a gate, though. The exemptions belong to eligible individuals, defined as someone compliant on their returns who “has reported as income any contributions to, earnings of, or distributions from” the trust. If your TFSA’s income has never touched your 1040, the argument wobbles before you’ve made it.

So do you file Form 3520 for your TFSA or not?

Over $50,000, or before the proposed rules, there’s no exemption to lean on. The call comes down to two positions:

	Position A: file the trust forms protectively	Position B: don’t file the trust forms
Forms each year	Form 3520 plus a substitute Form 3520-A, per TFSA	None for the TFSA itself; FBAR and Form 8938 still apply
Annual burden	Prep fees every year the account exists	Close to zero extra
Exposure if you’re wrong	Fees on forms you didn’t owe	The greater of $10,000 or the applicable percentage, per missed filing
Who tends to pick it	Larger balances, messier holdings, low appetite for an IRS argument	Smaller balances, income fully reported, or holders ready to close the account

Neither column is the safe one in the abstract. Position A turns an open question into a known annual cost. Position B keeps filings simple and carries a tail risk you’d have to argue your way out of. The right trade depends on the balance, the holdings, and how you price a fight with the IRS.

Whichever way you file, is TFSA income taxable in the US?

Yes. The Form 3520 debate only decides information forms. The interest, dividends, and gains inside your TFSA are taxable on your US return every year, because no treaty provision defers them. Article XVIII of the US-Canada treaty covers pensions and annuities, and the TFSA appears nowhere in it. That’s a citation to an absence, and the absence is the point. The RRSP got treaty relief and later its own reporting exemption. The TFSA got neither, so “tax-free” stops at the border.

Getting that income onto the 1040 is also the ticket into the small-account exemption. This is the seam that opens when a US preparer and a Canadian preparer each assume the other handled it. That’s why one preparer should own both sides.

The TFSA isn’t the only Canadian account this framework gets pointed at. An RESP runs through the same Rev. Proc. 2020-17 conditions and comes out somewhere different, and it carries grant and benefit questions the TFSA doesn’t: what happens to an RESP and the CCB when you move to the US.

What should I do next?

Before anyone touches a form, pull your TFSA paperwork and confirm which legal form you hold. The trust question only bites on the trust kind. Then find the account’s year-high value in US dollars and check whether its income has been landing on your 1040. Those facts decide most of this.

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