The US does not recognize the TFSA. Interest, dividends and gains earned inside it are taxable on your US return every year, whether or not you take money out.
The account also goes on your FBAR (and Form 8938 if you are over the threshold). The IRS has never said whether a TFSA is a foreign trust. If it is, Forms 3520 and 3520-A are due too, and many cross-border professionals file them to be safe.
Why the US taxes a TFSA
A TFSA is a Canadian tax shelter created by Canadian law. The US taxes its citizens and green card holders on their worldwide income, and nothing in US law or the US-Canada tax treaty exempts TFSA income. The treaty's pension rules cover retirement plans such as RRSPs and RRIFs. A TFSA is a savings account, so those rules don't reach it.
So each year you report the income earned inside your TFSA as if you held the investments directly:
- Interest on Schedule B and Form 1040.
- Dividends from Canadian companies as dividends (they can be qualified dividends if the holding period is met).
- Gains and losses on sales on Form 8949 and Schedule D, using the exchange rate on the purchase and sale dates.
- Mutual funds and ETFs inside a TFSA are PFICs, with no exemption. See Mutual funds and ETFs.
Contributions are not deductible in either country, and taking your own money out is not income. Only the earnings matter.
Why this is where you can actually owe US tax
Most Americans in Canada owe little or no US tax because the Canadian tax they pay is credited against their US tax (see Foreign tax credit). TFSA income is different: Canada doesn't tax it, so there is usually no Canadian tax on that income to credit. Unless you have spare foreign tax credits in the passive category, TFSA income can produce a real US tax bill. For most people with modest balances it is small, but it is not zero.
The Form 3520 question
A TFSA held at a bank or brokerage is set up as a trust arrangement under Canadian rules. If the US treats it as a foreign grantor trust, you are its owner and must file:
Due dates. Form 3520 is due April 15. If you live outside the US on that date, it moves to June 15, with a statement saying so. If you got an extension for your income tax return, it can go to October 15.
Is it really required? The IRS has not ruled. Some professionals file Forms 3520 and 3520-A for every TFSA because the penalties are large. Others don't, because the classification is unsettled. What is settled: the TFSA does not qualify for the Rev. Proc. 2020-17 exemption, which only covers retirement plans and accounts for medical, disability or education purposes.