Your TFSA After Moving to the US: Why the Answer Is Usually Close It Before You Go

Short version: TFSA for Non-Residents: What Changes When You Leave Canada

The TFSA does not survive the border the way the RRSP does, because no treaty article protects it. The treaty's pension provisions cover pensions; the CRA and IRS both treat the TFSA as an ordinary account for cross-border purposes — tax-free to Canada, fully visible to the US. For a Canadian who becomes a US resident, that means: the account's interest, dividends, and realized gains are taxable on the 1040 every year, with no Canadian tax paid to credit against them (Canada still doesn't tax the TFSA, even for non-residents); the reporting attaches (FBAR, Form 8938, and — depending on the account's legal wrapper — the foreign-trust question that IRS guidance has largely settled in favor of no 3520 for most TFSAs, while never settling the income inclusion); and any Canadian mutual funds inside are PFICs generating Form 8621 work at US rates that can exceed the income. Meanwhile the Canadian side quietly deactivates: contribution room stops accruing for non-resident years, contributions made while non-resident draw a 1% per-month penalty tax until removed, and withdrawals by a non-resident restore room only for a return that may never come. The asymmetry drives the standard answer: the TFSA's entire value proposition is Canadian tax freedom, the mover is leaving Canadian tax, and what remains after departure is a US-taxable account with foreign-account paperwork. Close it before the departure date — withdrawals are tax-free in Canada and pre-residency for the US — and redeploy the cash in a plain US account.

Key takeaways

• US treatment: annual taxation of all income and realized gains inside the TFSA on the 1040; no deferral, no exclusion, no credit relief (Canada collects nothing to credit).
• PFIC overlay: Canadian mutual funds and Canadian-listed ETFs in the TFSA are PFICs to a US-resident holder — the default excess-distribution regime is punitive, and Form 8621 files per fund per year. If anything survives the move, it should not be Canadian funds.
• Reporting: FBAR and 8938 include the TFSA; the 3520/3520-A question for TFSAs organized as trusts has been substantially relieved by IRS guidance exempting most tax-favored foreign accounts, but the relief is procedural — the income was always taxable and remains so.
• Canadian side after departure: no tax on the account or withdrawals ever (even for non-residents); room frozen for non-resident years; the 1% monthly tax on non-resident contributions makes accidental automatic contributions genuinely costly — kill the auto-deposits before the flight.
• The timing of the close matters: withdraw while still a Canadian resident and before US residency starts (watch the substantial presence test and the green-card date — US residency can begin earlier than the move) so the accumulated gains are realized in the tax-free Canadian window with no US claim.
• The keep case is thin but exists: a short posting with a certain return to Canada argues for emptying the investments into cash equivalents (minimizing annual US-taxable income) and keeping the shell so room restoration works on return — accepting the paperwork for the reversibility.

The pre-departure sequence

Stop automatic contributions immediately. Sell holdings inside the TFSA (no Canadian tax; if done before US residency, no US tax either — sequencing against the US residency start date is the whole game). Withdraw and close, keeping the year-end paper trail. Redeploy in the US in ordinary taxable accounts with US-listed holdings — the after-tax result beats a US-taxable TFSA stuffed with PFICs by a wide margin, and the FBAR gets one line shorter.

Worked example

A Calgary nurse moving to Phoenix on August 20 holds a C$95,000 TFSA: C$70,000 in Canadian equity mutual funds, C$25,000 in a GIC maturing in October, with a C$400 monthly auto-contribution. July: auto-contribution cancelled; funds sold inside the TFSA (C$18,000 of accumulated gains — tax-free, Canada; not yet US-resident, so no US claim); the GIC is redeemed early with a small interest haircut, priced against the alternative of a US-taxable foreign account holding it through October plus the FBAR line. August 10: the TFSA is withdrawn in full and closed; the cash crosses as cash. In Phoenix she invests the C$95,000 equivalent in US index ETFs in a plain brokerage account. What she avoided, priced: roughly C$3,500 a year of US tax and preparation cost on a kept TFSA (fund distributions at US rates, two 8621s, FBAR/8938 lines) for an account Canada was no longer sheltering from anything — and the 1% monthly penalty the forgotten auto-contribution would have started charging in September.

Official sources

The CRA explains the tax-free savings account rules, including that contribution room accumulates only for years in which an individual is at least 18 and resident in Canada, that income earned in the account and withdrawals are not taxed in Canada, and that contributions made while non-resident attract a special tax. — Canada Revenue Agency, The Tax-Free Savings Account, https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account.html

Form 8621 is filed by a US person that is a direct or indirect shareholder of a passive foreign investment company, including to report distributions, dispositions, and elections such as the qualified electing fund and mark-to-market elections. — Internal Revenue Service, About Form 8621, https://www.irs.gov/forms-pubs/about-form-8621

Practitioner note

TFSAs are the mirror image of the RRSP conversation: no treaty protection, no deferral, and the whole benefit evaporates at the border, so the plan is a clean pre-departure close sequenced before US residency begins. The two details that do the damage when missed are the auto-contribution that keeps running (1% a month says hello) and the Canadian funds that cross the border and wake up as PFICs.

See also: For your RRSP after moving to the US, see your RRSP after moving to the US; and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the TFSA wind-down — sequencing the sale and close against the US residency start, killing auto-contributions, and redeploying into US-clean holdings. See cross-border pricing or book a call.