TFSA vs Roth IRA: What Each Country Recognizes

A tax-free savings account (TFSA) and a Roth IRA are cousins: after-tax contributions, tax-free growth, tax-free withdrawals. The resemblance ends at the border. The United States does not recognize the TFSA — a U.S. person is taxed on its income every year. Canada recognizes a Roth IRA only if the owner files a treaty election and stops contributing while resident.

On this page

1. How each works at home
2. Why doesn't the United States recognize the TFSA?
3. Why does Canada recognize the Roth only conditionally?
4. What about the traditional IRA and the RRSP?
5. Worked example
6. Frequently asked questions
7. Related guides
8. Official sources
9. Next step

How each works at home

Why doesn't the United States recognize the TFSA?

Because nothing in U.S. law or the treaty says it should. The Canada–U.S. treaty's pension article covers RRSPs, RRIFs, and registered pension plans — it was written before the TFSA existed (2009) and has not been amended to include it. To the IRS, a TFSA is an ordinary investment account (or, depending on how it is set up, a foreign trust): a U.S. citizen living in Canada, or a Canadian who moves to the United States with a TFSA, reports its interest, dividends, and capital gains on the U.S. return every year and pays U.S. tax on them, with no Canadian tax to credit. The account is reported on the FBAR and Form 8938. Whether Forms 3520 and 3520-A (foreign trust returns) are also required has been the contested question: the IRS's 2020 revenue procedure (Rev. Proc. 2020-17) exempts only tax-favored foreign savings trusts used almost exclusively for medical, disability, or education benefits, with withdrawals tied to those purposes and contributions capped at US$10,000 a year or US$200,000 in total — a general-purpose TFSA with free withdrawals does not qualify, and the IRS has issued no TFSA-specific guidance, so the Form 3520 question stays open if the TFSA is a trust. The practical advice for a Canadian moving south: withdraw the TFSA before departure — the growth to that point was tax-free in both countries, and every dollar of growth afterward is U.S.-taxable — and never contribute while a U.S. person.

Why does Canada recognize the Roth only conditionally?

The treaty's fifth protocol (signed in 2007, in force since December 2008, effective 2009) added Roth IRAs to the pension article: a Canadian resident who owns a Roth may elect to defer Canadian tax on its income until distribution, and distributions that would be tax-free in the United States are tax-free in Canada too — but only for the "pre-move" balance. Any contribution made while a resident of Canada is a "Canadian contribution": from then on, all income the account earns — including growth on the pre-move balance — is taxed in Canada each year, and only the balance just before that contribution stays protected. The election is a one-time letter mailed to the CRA's Competent Authority Services Division by the filing due date for the first year of Canadian residency (each Roth account separately), and it is irrevocable. The advice for an American moving north: file the election in year one, stop contributing to the Roth the day you become a Canadian resident, and — because the phrase "Canadian contribution" includes rollovers from a traditional IRA — do no Roth conversions while resident in Canada.

What about the traditional IRA and the RRSP?

They cross the border more gracefully. A traditional IRA is recognized by Canada as a foreign pension: growth deferred, distributions taxable in Canada as pension income with a foreign tax credit for the U.S. withholding. An RRSP is recognized by the United States under the treaty with automatic deferral (the RRSP guide). It is the two after-tax accounts — the TFSA and the Roth — that the other country handles badly, in opposite ways.

Worked example

Two people cross in opposite directions. A Calgary nurse with a C$95,000 TFSA (C$60,000 contributed, C$35,000 growth) takes a job in Denver. Her adviser: withdraw the TFSA before the move — the C$35,000 of growth was tax-free in Canada and the withdrawal is tax-free; the room stays available if she ever returns. She does, and invests the cash in a U.S. brokerage account. Had she kept the TFSA, its future dividends and gains would have been U.S.-taxable every year with no offsetting Canadian tax, the account would sit on her FBAR and Form 8938, and the foreign trust question would hang over each return. A Boston consultant with a US$180,000 Roth IRA moves to Toronto. Her adviser: mail the treaty election to the CRA by her first Canadian filing deadline, and stop all contributions and conversions the day she becomes resident. The US$180,000 and its growth stay tax-free in both countries; a US$7,500 contribution she nearly made in her first Canadian year would have created a permanently unprotected slice of the account.

Frequently asked questions

Official sources

The CRA states: “Any contribution you make to your TFSA and any income you earn through interest, dividends or capital gains are generally tax-free, even when you make a withdrawal. However, unlike a registered retirement savings plan (RRSP), contributions you make to a TFSA are not tax deductible.” — Canada Revenue Agency, What is a TFSA, https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/what.html

Publication 597 states: “A distribution from a Roth IRA is exempt from Canadian tax to the extent it would be exempt from U.S. tax if paid to a U.S. resident. In addition, you may elect to defer any tax in Canada on income accrued within the Roth IRA but not distributed by the Roth IRA.” — Internal Revenue Service, Publication 597, Information on the United States–Canada Income Tax Treaty, https://www.irs.gov/publications/p597

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk and Canadian Tax Desk handle TFSA and Roth IRA planning at the border — pre-departure TFSA withdrawals, the Roth treaty election in the first Canadian year, foreign trust reporting analysis, and FBAR and Form 8938 coordination. See pricing or book a call.