An RESP opened years earlier became the whole US filing problem

The situation

The letter came from the IRS, not from CRA, and that alone told Micheline something unusual was happening. She had lived in Lindsay for most of her adult life, running a small bookkeeping practice from home, married to Marc-Andre, a transit operator, and raising two kids who had never lived anywhere but Ontario. She had been born in the United States and moved to Canada with her parents as a child, which made her a US citizen by birth even though almost nothing about her daily life connected to the country. She filed a Canadian return every year without incident. She had never given her US filing obligations much thought, because nobody had ever told her she still had any.

Like most Canadian parents, she and Marc-Andre had opened a tax-free savings account each, and years earlier, when their older child was born, an RESP to save for education. The RESP had actually been opened jointly with Micheline's sister Shirin, a long-haul truck driver who wanted to contribute toward her niece's and nephew's education and who was listed on the account as a co-subscriber alongside Micheline. It was a practical, informal arrangement between sisters, set up at a bank branch in an afternoon, and nobody involved thought about it again except to make occasional contributions. Those contributions went in unevenly over the years — some as lump sums around birthdays, others as smaller automatic transfers — and nobody had ever tracked whose money was whose beyond a shared, unexamined sense that they were splitting it roughly.

The IRS letter identified both the TFSA and the RESP by account number and described them as unreported foreign trusts. It proposed penalties calculated as a percentage of the account balances for each year they had gone unreported, going back several years. The notice calculated a separate penalty for each of the past several years rather than treating the omission as a single, ongoing failure, stacking one year's figure on top of the next. The dollar figures on the notice, run against both accounts and multiple years, put tens of thousands of dollars at stake — money that dwarfed what either account actually held or had ever earned.

Micheline had never heard the phrase 'foreign trust' applied to a savings account before. She assumed, reasonably, that a government-registered Canadian account with no trust deed, no trustee, and no discretionary distributions could not possibly meet whatever the IRS meant by that term. The notice made clear the IRS disagreed, and that it considered the reporting failure to already be years deep.

Why this was harder than it looked

The uncomfortable truth is that the IRS's position, while it feels wrong to most Canadians hearing it for the first time, has real legal footing. The US does not treat a TFSA or RESP the way Canada does, and both have long been viewed as potentially caught by the US foreign trust rules. The IRS has since exempted certain tax-favoured foreign savings accounts from the separate trust reporting forms, and whether that relief applies depends on the account and the person's circumstances — so this needs a US cross-border opinion rather than an assumption that the forms are always due. Separate foreign account reporting can still apply either way. Missing that reporting carries penalties calculated independently of the underlying tax owed, which is why the notice's proposed numbers looked so disproportionate to the modest sums the accounts actually held. Citizenship, and the filing obligation that comes with it, passes at birth under US law regardless of how long the person actually lives in the country afterward, and it does not lapse on its own; only a formal renunciation ends it, which is why the obligation had followed Micheline to Lindsay without her ever knowing it existed.

What made the case harder than a straightforward late-filing problem was the RESP's ownership structure. US foreign trust reporting obligations attach to the person considered the trust's owner or a substantial contributor to it, and with two co-subscribers, the question of how much of the account was attributable to Micheline, as opposed to Shirin, was not academic. Shirin was not a US citizen and had no US filing obligation of her own, but the proportion of the RESP treated as hers directly reduced what Micheline needed to report and what any penalty could be calculated against.

The account's actual ownership split, though, was not recorded anywhere obvious. The original subscriber agreement, held by the financial institution rather than by either sister, was the only document that specified the contribution and ownership terms the two of them had agreed to at account opening. Neither Micheline nor Shirin had kept a copy. Until that document was located, any position we took on the ownership split would be an assertion rather than something the IRS had reason to accept, and the whole reporting correction depended on getting the split right.

There was also a narrower question sitting underneath the larger one: whether the reporting failure had been non-wilful, which affects both which correction program is available and how penalties are calculated under it. Micheline's account of simply not knowing the rule existed was credible, but credibility alone does not carry a filing position — it needed to be documented and framed correctly from the start.

What we did

1. Confirmed the accounts' actual status before responding to the notice, verifying that both the TFSA and the RESP were standard, government-registered Canadian accounts with no trust deed or discretionary trustee powers, which mattered for how the correction filings characterized them even though it did not change the underlying US reporting obligation itself, pulling the account-opening documentation directly from each financial institution rather than relying on Micheline's own recollection of how the accounts had originally been structured.
2. Requested the original RESP subscriber agreement directly from the financial institution, since neither Micheline nor Shirin had retained a copy and the ownership split it recorded was the single document the entire correction depended on getting right — without it, any figure we filed would be an educated guess rather than something the IRS had reason to accept. The request took several weeks and two follow-up calls before the branch located a copy in its archived records.
3. Interviewed Shirin to reconstruct contribution history where the subscriber agreement was silent on year-by-year amounts, comparing her recollection against the bank's contribution statements to build a defensible, document-supported allocation between the two sisters rather than an assumed even split that neither of them could actually verify, walking through each year's transfers together over several calls until the two accounts matched, which took longer than expected but produced a split neither sister needed to guess at.
4. Assessed eligibility for a non-wilful correction filing, reviewing Micheline's filing history, her actual knowledge of US obligations at the time the accounts were opened, and the circumstances of the RESP's creation, and concluded her failure to report reflected genuine unfamiliarity with the rule rather than any attempt to conceal the accounts, which shaped which correction channel was available to her.
5. Prepared corrected foreign trust reporting for the years at issue, calculated against Micheline's actual ownership share of each account once the subscriber agreement and contribution history were in hand, rather than against the full account balances the original IRS notice had used by default in the absence of any other information, filing the required forms separately for each account and each year still open under the applicable reporting rules, rather than one combined submission that would have been harder for the IRS to verify against its own records.
6. Submitted the correction through the appropriate voluntary compliance channel, which is generally the more favourable route for a non-wilful failure discovered before enforcement action is complete, and responded to the pending notice referencing that submission so the two processes were coordinated rather than running independently, and included a written statement setting out the non-wilful basis for the failure so the reviewing officer had that context before evaluating the numbers themselves.
7. Restructured how future contributions to the RESP would be recorded, separating Shirin's ongoing contributions clearly from Micheline's in a simple shared log going forward, so that future US reporting would not require reconstructing the split from scratch each year the way this correction had, with both sisters signing off on each year's entry so there would be no dispute about the record later, however small the amounts involved.
8. Reviewed the TFSA and RESP alongside Marc-Andre's own accounts to confirm that, as a Canadian citizen with no US filing obligation, nothing in his holdings carried any related exposure, closing off the one open question the family still had once the correction itself was underway, and confirmed separately that the two children, as Canadian citizens with no US ties of their own, had no reporting exposure even though the RESP existed to fund their education.

The outcome

The IRS accepted the corrected filings and closed the matter without assessing a penalty. The non-wilful correction channel, combined with the properly documented ownership split, meant the resolution turned on Micheline's actual, modest share of the two accounts rather than the full balances the original notice had used, which was the difference between the tens of thousands of dollars the notice threatened and the far smaller outcome the family actually faced. The corrected filings covered every year still open under the applicable reporting rules, not only the years the original notice had specifically flagged, which closed off the possibility of a follow-up notice reaching further back once the file was settled.

Nothing about the underlying rule changed. Micheline still has ongoing US reporting obligations tied to the TFSA and the RESP for as long as she holds them, and that reporting now happens every year as a matter of course, built into her regular tax preparation, rather than something discovered after the fact by a notice in the mail. The correction resolved the past failure; it did not remove the obligation going forward, and it will not remove it for as long as she remains a US citizen.

Locating the subscriber agreement turned out to be the hinge the whole case swung on. Without it, any position on ownership would have been guesswork the IRS had no reason to credit, and the correction filings would almost certainly have been calculated against the full account balances by default, producing a far larger exposure than the family's actual share of either account justified.

Shirin, who had never expected her niece's and nephew's education fund to become part of a US tax matter, cooperated readily once she understood what was needed, providing her own bank records without hesitation. The delay in tracking the original document down through the financial institution was, in the end, the single longest stretch of the whole process, longer than preparing the correction filings themselves once the ownership split was finally settled.

What you can learn from this