1. Step One: Is the Account a Trust at All?
Form 3520 and Form 3520-A reporting under IRC § 6048 applies to foreign trusts. Before reaching Rev. Proc. 2020-17, the threshold question is whether the account is a trust for U.S. tax purposes under Treas. Reg. § 301.7701-4.
Canadian law permits a TFSA to be set up in one of three forms: as a trust with a trust company, as a deposit with a bank or credit union, or as an annuity contract with an insurer. FHSAs can likewise be set up as a trust, deposit, or annuity contract. RESPs are generally set up as trusts. Brokerage and self-directed accounts are typically trusts; a TFSA savings account at a bank may be a deposit.
Practical point
Obtain the account agreement or declaration of trust. If the account is a deposit or annuity contract, the foreign trust analysis generally does not apply. If it is a trust, some practitioners argue that a trusteed account functions as a custodial or agency arrangement rather than a trust for U.S. purposes, but that position has no direct support in published IRS guidance, and most practitioners proceed on the basis that it is a trust.
2. Rev. Proc. 2020-17 in Brief
Rev. Proc. 2020-17 exempts eligible individuals from IRC § 6048 reporting for two categories of "applicable tax-favored foreign trusts." An eligible individual is a U.S. citizen or resident who is compliant with U.S. income tax filing requirements for open years, including reporting the trust's contributions, earnings, and distributions as income where U.S. law requires.
Tax-favored foreign retirement trust (§ 5.03)
- Operates exclusively or almost exclusively to provide retirement or pension benefits
- Generally exempt from tax or otherwise tax-favored locally
- Annual information reporting available to local tax authorities
- Only contributions from earned income from personal services
- Contributions limited by a percentage of earned income, an annual limit of $50,000 or less, or a lifetime limit of $1,000,000 or less
- Withdrawals conditioned on retirement age, disability, or death, or penalized if made earlier
Tax-favored foreign non-retirement savings trust (§ 5.04)
- Operates exclusively or almost exclusively to provide medical, disability, or educational benefits
- Generally exempt from tax or otherwise tax-favored locally
- Annual information reporting available to local tax authorities
- Contributions limited to $10,000 or less annually or $200,000 or less on a lifetime basis
- Withdrawals conditioned on providing medical, disability, or educational benefits, or penalized if made before those conditions are met
There is no category for general savings or home-purchase accounts. An account that fits neither definition is outside the exemption and is analyzed under the ordinary foreign trust rules. Rev. Proc. 2020-17 applies to all open years and provides a Form 843 procedure to request abatement or refund of previously assessed § 6677 penalties for qualifying trusts.
3. TFSA (Tax-Free Savings Account)
The TFSA annual dollar limit is C$7,000 for 2026, and unused room carries forward indefinitely. A person eligible every year since 2009 has cumulative room of C$109,000 in 2026. Withdrawals can be made at any time for any reason, without tax, and the amount withdrawn is added back to contribution room the following year.
Arguments that the exemption applies
- The account is tax-favored in Canada and subject to annual information reporting to the Canada Revenue Agency.
- The annual dollar limit is below $10,000, and cumulative room to date is below $200,000.
Arguments that it does not
- A TFSA is a general-purpose savings vehicle; it does not operate exclusively or almost exclusively for medical, disability, or educational benefits.
- Withdrawals are unrestricted and carry no penalty.
- Carried-forward room allows contributions well above $10,000 in a single year, and re-contributed withdrawals mean total contributions over time are not capped in the way the lifetime test contemplates.
- It is not a retirement trust: contributions are not limited by reference to earned income, and withdrawals are not tied to retirement age.
The weight of the analysis is against the exemption, and the Canada–U.S. income tax treaty is generally not regarded as covering TFSAs (the treaty's pension provisions are what support RRSP and RRIF treatment). Many practitioners therefore treat a trusteed TFSA owned by a U.S. person as a foreign grantor trust: the owner reports the TFSA's income currently on Form 1040 and files Form 3520 (Part II) with a substitute Form 3520-A each year.
4. FHSA (First Home Savings Account)
The FHSA, available since 2023, allows deductible contributions of C$8,000 per year up to a C$40,000 lifetime limit, with up to C$8,000 of unused room carried forward to the next year. Qualifying withdrawals for a first home purchase are tax-free. Non-qualifying withdrawals are included in income. Unused balances can be transferred to an RRSP or RRIF without affecting RRSP room. The account must generally be closed within 15 years of opening or by the end of the year the holder turns 71.
Arguments that the exemption applies
- The C$40,000 lifetime limit is well below $200,000, satisfying the alternative lifetime test even in years when carryforward pushes annual contributions above $10,000.
- The account is tax-favored, reported to the Canada Revenue Agency, and its use is restricted by statute.
- Non-qualifying withdrawals lose their tax-free character, which can be characterized as a penalty on early or improper withdrawal.
- The tax-free transfer path to an RRSP or RRIF links the account to Canada's retirement system, and the policy behind Rev. Proc. 2020-17 (relieving reporting for tightly regulated, government-sanctioned savings vehicles) arguably extends to it.
Arguments that it does not
- A home purchase is not one of the purposes listed in § 5.04 (medical, disability, or educational benefits), and the text gives no room for additional purposes.
- It is not a retirement trust under § 5.03: contributions are not limited by reference to earned income, and withdrawals are not conditioned on retirement age, disability, or death.
- Rev. Proc. 2020-17 predates the FHSA, and the IRS has not extended it to new account types.
- Including a withdrawal in ordinary income is the normal consequence of a deductible contribution, not necessarily a "penalty."
On the text of Rev. Proc. 2020-17, the stronger reading is that the FHSA does not fit either category. The policy arguments for relief are real, but they have not been adopted in any published guidance. Practitioners are divided, and many file protectively for trusteed FHSAs.
5. RESP (Registered Education Savings Plan)
An RESP is a trust established by a subscriber (typically a parent or grandparent) for one or more beneficiaries. Contributions are not deductible and are limited to C$50,000 per beneficiary over the beneficiary's lifetime, with no annual limit. The Canada Education Savings Grant (CESG) adds 20% of the first C$2,500 contributed each year, up to C$7,200 per beneficiary. Educational Assistance Payments (EAPs) of grants and earnings are taxed to the student. Contributions can be returned to the subscriber tax-free, but grants must be repaid if contributions are withdrawn for non-educational purposes. Accumulated income payments (AIPs) of earnings to the subscriber are taxed at ordinary rates plus an additional 20% tax (12% for Québec residents), which can be reduced by a transfer to the subscriber's RRSP.
Arguments that the exemption applies
- The RESP's statutory purpose is educational, which is a listed purpose in § 5.04.
- The C$50,000 lifetime limit per beneficiary is below the $200,000 lifetime test for an individual plan.
- Earnings withdrawn for non-educational purposes are subject to an additional 20% tax and grants must be repaid, which fits the "penalties on withdrawals made before such conditions are met" language.
- The plan is tax-favored and subject to information reporting to the Canada Revenue Agency and Employment and Social Development Canada.
Arguments that it does not
- Contributions can be returned to the subscriber at any time for any purpose without a tax penalty, so withdrawals are not fully conditioned on educational use.
- The money can ultimately go to the subscriber rather than to education, which tests the "exclusively or almost exclusively" requirement.
- A family plan with several beneficiaries can hold more than $200,000 of total contributions, failing the lifetime test at the plan level.
- Government grants make the ownership analysis complex: the subscriber is generally the grantor of contributed amounts, but the grant portion has a different source.
The RESP has the strongest case of the three for the exemption, particularly for an individual plan, but no guidance resolves it. Where the exemption is not relied on, the U.S. subscriber is commonly treated as the owner of the contributed portion under the grantor trust rules, and a U.S. beneficiary receiving EAPs may have a separate Part III distribution question. Practitioners are divided, and many file protectively.
6. RRSP and RRIF, for Contrast
Registered Retirement Savings Plans and Registered Retirement Income Funds are the clearest Canadian example of a tax-favored foreign retirement trust under § 5.03, and eligible individuals generally do not file Form 3520 or Form 3520-A for them. Separately, Rev. Proc. 2014-55 allows U.S. persons to defer U.S. tax on undistributed RRSP and RRIF income under the treaty without a separate election form. FBAR and Form 8938 reporting still apply where the thresholds are met.
7. Two Issues Beyond Form 3520
PFICs inside the account
Canadian mutual funds and ETFs are generally passive foreign investment companies (PFICs). When a TFSA, FHSA, or RESP is treated as a grantor trust, the U.S. owner is generally treated as owning the underlying investments directly, which can bring Form 8621 and the PFIC regime into play. Unlike RRSPs, these accounts do not have treaty-based deferral that would shelter the PFIC income.
No U.S. tax exemption
"Tax-free" in Canada does not mean tax-free in the U.S. Income earned inside a TFSA or FHSA is generally taxable to a U.S. owner currently, and the Canadian tax exemption does not carry over. This is true whether or not Form 3520 reporting applies, and it is often the more expensive issue for the client.
8. What Filing Looks Like When Reporting Applies
- Form 3520, Part II: the U.S. owner reports ownership of the foreign grantor trust. Contributions are reported in Part I; distributions in Part III.
- Substitute Form 3520-A: Canadian financial institutions generally do not file Form 3520-A. The U.S. owner prepares a substitute Form 3520-A, including the trust's income statement, balance sheet, and owner statement, and attaches it to Form 3520. Without it, the owner is exposed to the greater of $10,000 or 5% of the trust assets under IRC § 6677(b).
- Due date: the substitute follows the Form 3520 due date: April 15, June 15 for filers living abroad, or October 15 with a Form 4868 extension. See Form 3520 & 3520-A Due Dates by Year.
- Filing method: paper filing with the IRS in Ogden, Utah, separate from the e-filed Form 1040. See Can Form 3520 or 3520-A Be E-Filed?
- One return per account: each trusteed account is generally a separate foreign trust, so a client with a TFSA at one institution and an FHSA at another may need two substitute Forms 3520-A.
9. Prior Years Not Filed
Clients with Canadian accounts frequently learn of the issue years after opening them. Penalties under IRC § 6677 can be significant relative to modest account balances: the greater of $10,000 or 35% of contributions and distributions under § 6677(a), and the greater of $10,000 or 5% of trust assets under § 6677(b). Relief generally depends on reasonable cause, and the approach to delinquent filings involves judgment about which years to file and how. See Form 3520 Penalty Relief & Reasonable Cause.
10. Frequently Asked Questions (FAQ)
Does a TFSA require Form 3520?
The IRS has not ruled on TFSAs specifically. A TFSA held in trust form generally does not satisfy Rev. Proc. 2020-17 because withdrawals are unrestricted and the account is not limited to medical, disability, or educational purposes. Many practitioners therefore treat a trusteed TFSA as a foreign grantor trust and file Form 3520 with a substitute Form 3520-A each year. TFSAs held as deposits or annuity contracts may not be trusts at all.
Is an RRSP or RRIF reportable on Form 3520?
Generally no. Rev. Proc. 2020-17 exempts eligible individuals from Form 3520 and Form 3520-A reporting for tax-favored foreign retirement trusts, and RRSPs and RRIFs are widely regarded as meeting that definition. FBAR and Form 8938 reporting may still apply.
Does an FHSA qualify for the Rev. Proc. 2020-17 exemption?
The question is unsettled. The FHSA meets the contribution limits and is tax-favored with reporting to the Canada Revenue Agency, but its purpose, a first home purchase, is not one of the medical, disability, or educational purposes listed for non-retirement savings trusts, and its contributions are not tied to earned income as required for retirement trusts. No IRS guidance addresses the FHSA directly.
Does an RESP qualify for the Rev. Proc. 2020-17 exemption?
The question is unsettled. An RESP has an educational purpose, a $50,000 lifetime contribution limit per beneficiary, and an additional tax on non-educational withdrawals of income, which support qualification. Against it, contributions can be returned to the subscriber for any purpose, and family plans with several beneficiaries can exceed the $200,000 lifetime contribution limit.
Who files Form 3520-A for a TFSA?
Canadian financial institutions generally do not file Form 3520-A. If the TFSA is treated as a foreign grantor trust, the U.S. owner generally prepares a substitute Form 3520-A and attaches it to the owner's Form 3520, which follows the owner's income tax return due date including extensions.
Preparing Form 3520 for a Canadian Account?
Each Agena Software trust return includes Form 3520 and the substitute Form 3520-A, with print-ready filing packages and an Ogden mailing checklist.