Health Savings Accounts (HSA) for US Expats in Canada – What you need to know

Health Savings Accounts (HSA) for US Expats in Canada – What you need to know

Key Points

• Health Savings Accounts (HSAs) offer U.S. expats in Canada tax-free growth and withdrawals for qualified medical expenses.
• Contributions to an HSA are not tax-deductible in Canada, potentially leading to double taxation on income used for contributions.
• Withdrawals from an HSA for non-medical expenses may be subject to both U.S. and Canadian taxes and penalties.
• Properly managing an HSA while living in Canada requires careful planning to comply with both U.S. and Canadian tax regulations.
• Consulting a cross-border tax professional is essential to optimize the benefits of an HSA for U.S. expats in Canada.

If you need help in reviewing your cross-border tax or investment situation, please feel free to reach out to us here. We look forward to speaking to you soon.

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We work without a lot of Americans making the move to Canada. In addition to retirement and traditional investment accounts, they also often have Health Savings Accounts (HSA) already in place as part of their family’s financial structure. For US purposes these plans can work great, giving families the ability to save on a tax deferred basis for future family healthcare expenses.

Unfortunately the tax rules between Canada and the US can be quite different for HSAs. In this article we’ll discuss HSAs and the tax and financial implications of holding these accounts while in Canada.

WHAT IS A HEALTH SERVICE ACCOUNT?

A health service account is a type of financial account that is designed to help individuals and families manage the costs of healthcare. Health service accounts can take several different forms, including Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs). These accounts allow individuals to set aside pre-tax dollars to pay for eligible healthcare expenses, including deductibles, co-payments, prescription medications, and other medical costs.

Depending on the type of account, there may be certain restrictions or requirements for contributions and spending, but in general, health service accounts can be an effective way to manage healthcare costs and save money on medical expenses. Health service accounts are often offered as part of an employer-sponsored healthcare plan or through private insurance companies, and they can be a valuable tool for individuals and families looking to make the most of their healthcare dollars.

HOW IS A HEALTH SERVICE ACCOUNT TAXED IN THE US?

The tax treatment of a health service account in the United States can vary depending on the type of account. Health Savings Accounts (HSAs) are funded with pre-tax dollars and any contributions made to the account are tax deductible. Additionally, any interest or investment earnings on the account are tax-free. Withdrawals from an HSA are tax-free if they are used to pay for qualified medical expenses. Flexible Spending Accounts (FSAs) are also funded with pre-tax dollars, but any funds remaining in the account at the end of the year are forfeited.

Health Reimbursement Arrangements (HRAs) are funded by the employer, and any reimbursements for qualified medical expenses are tax-free. In general, health service accounts offer significant tax advantages and can help individuals and families save money on healthcare expenses. However, it is important to understand the specific tax rules and regulations governing each type of account to ensure that you are making the most of your healthcare dollars.

HOW ARE HSAS TAXED IN CANADA?

Canada does not officially recognize HSAs as deferred plans for tax purposes. Essentially in the eyes of the Canadian government these plans are simply foreign based investment accounts. All the income earned in the accounts (capital gains, interest, dividends, etc) are to be reported for tax purposes (in Canadian dollars) and also reported on form T1135 if the respective taxpayer is required to file the T1135. Also note that any contributions to HSAs will not be deductible for Canadian tax purposes.

WHAT PLANNING OPPORTUNITIES ARE THERE FOR AMERICANS LIVING IN CANADA WITH HSAS?

One might consider fully liquidating the HSAs before returning to Canada, however the penalties incurred on such a liquidating should likely be avoided. Rather I would consider the following potential planning ideas:

• Try to maintain a very simple investments structure within the plan. One or two index fund positions might be ideal to reduce any Canadian tax or T1135 reporting complexities while the plan is in existence.
• Use these funds first to pay for medical expenses while in Canada. As long as the amounts withdrawn from the plan are to pay for family medical costs the withdrawals will not be taxable in the US. The withdrawals will also not be taxable in Canada, however any income earned within the plan will be taxed for Canadian purposes.
• Once the plan is exhausted it makes sense to fully retire the account.

Planning for cross-border moves can involve significant complexity and risk. Make sure to reach out to a competent cross-border tax professional for specific advice on tax issues that relate to your particular situation.

We’ve helped hundreds of families move from the US to Canada while ensuring their future tax and investments goals are properly planned for. This planning also includes IRA, ROTH IRA, trust accounts and traditional investment account planning.

If you would like to review your cross-border financial situation please reach out to us today to book your complementary cross-border consultation. I look forward to speaking to you soon.

Regards

Chris