The FHSA and US tax: a first-home account the IRS has never heard of

The First Home Savings Account is the newest of Canada's registered wrappers and, on paper, the most generous: it borrows the deduction from the RRSP and the tax-free exit from the TFSA and stacks them. Every bank and broker in Canada now opens one in a few taps. For a US citizen living in Canada it is also the newest way to accumulate a US filing problem that nothing in Canada will ever flag.

What the FHSA is, in Canadian terms

• Open to Canadian residents aged 18 or over who are first-time home buyers, since 1 April 2023.
• Contributions of up to $8,000 a year and $40,000 over the account's life, deductible against Canadian income like an RRSP contribution; unused room carries forward, capped at $8,000.
• Income and gains accumulate free of Canadian tax, and a qualifying withdrawal to buy a first home is tax-free in Canada.
• The account must close after 15 years, at the end of the year you turn 71, or the year after a first qualifying withdrawal — whichever comes first. What is left can move to an RRSP or RRIF without using RRSP room.
• A withdrawal for any other purpose is taxable in Canada.

What the IRS sees instead

US citizens are taxed on worldwide income wherever they live. A foreign account shelters income from US tax only when US law or a treaty says so — as Article XVIII of the 1980 Convention does for an RRSP, made automatic by Rev. Proc. 2014-55. That procedure is written for Canadian retirement plans. An FHSA exists to buy a house; it is not a pension, the pension article does not describe it, and the saving clause in Article XXIX keeps the United States' right to tax its own citizens as though the treaty had not been signed.

So, for the US return: the contribution is simply after-tax savings, with no deduction. The interest, dividends and realised gains inside the account are your income, reported on Form 1040 in the year they arise. And because Canada charges no tax on that income, there is nothing to credit against the US tax on it under Form 1116 — the same asymmetry that makes the TFSA expensive.

The Form 3520 question, stated honestly

An FHSA can be set up as a trust, an annuity contract or a deposit — the same three legal forms as a TFSA — and the trusteed form is the common one at a brokerage. Whether that arrangement is a foreign trust for US purposes, and so within Form 3520 / 3520-A, is the same open classification question the TFSA raises, with the same confident answers available in both directions.

Rev. Proc. 2020-17 is often reached for and does not apply. Its exemption from Forms 3520 and 3520-A covers trusts operated exclusively or almost exclusively to provide pension or retirement benefits, or medical, disability or educational benefits. A first home is none of those, so the FHSA's purpose restriction — which the TFSA lacks — does not bring it inside the safe harbour. The prior question, whether the account is a trust at all or a custodial arrangement, still has to be answered from its own terms.

And then there is what is inside it

An FHSA held at a bank is often a savings balance or a GIC — no PFIC, but the interest is US-taxable. An FHSA at Wealthsimple, Questrade or a bank brokerage is usually invested, and what it is invested in is a Canadian mutual fund or a TSX-listed ETF: a non-US pooled vehicle that commonly meets the §1297 tests. Each such fund generally raises its own Form 8621 every year it is held, on top of the current taxation of the income.

Reporting, which applies either way

• FBAR. An FHSA is a foreign financial account. It counts toward the $10,000 aggregate across every non-US account you hold.
• Form 8938. The balance counts toward the specified-foreign-financial-asset thresholds ($300,000 for a single filer abroad at any point in the year).
• Form 8621. Generally one per PFIC per year, for the funds inside.
• Form 3520 / 3520-A. If the account is a foreign trust for US purposes — the open question above.

Working out where you stand

1. Pull the FHSA statement and list every holding with its ticker or fund code.
2. Separate cash and GICs from pooled funds — only the pooled funds raise the PFIC question.
3. For each fund, note whether it is a Canadian mutual fund, a TSX-listed ETF, or a US-listed ETF; the listing and the ISIN prefix (CA or US) tell you.
4. Total the income the account earned by year — interest, dividends, realised gains — because that belongs on the 1040 regardless of the wrapper.
5. Re-run the Foreign Tax Credit for the year with the FHSA deduction included: the lower Canadian tax may leave US tax on your salary uncovered.
6. Check the account's own terms against Rev. Proc. 2020-17 before assuming a Form 3520 position either way.
7. Decide the go-forward question separately from the historical one: what to do next year is not the same problem as what to report for this one.

The honest conclusion for many dual citizens is that the FHSA's whole advantage is Canadian, and their other citizenship ignores it while adding reporting on top. That does not make it useless — the Canadian deduction is real money — but it makes the decision a two-country one, and the US side is the one no Canadian institution will raise.