U.S. President Donald Trump rings the opening bell for the New York Stock Exchange and Nasdaq during an event to mark the launch of Trump accounts in the Oval Office at the White House in Washington, D.C., on July 6. REUTERS/Evan Vucci/File PhotoEvan Vucci/Reuters
Trump accounts launched earlier this month in the United States, and clients who are U.S. persons and reside in Canada are determining whether they should set one up for their children.
Positioned as tax-advantaged investment accounts for children under 18, Trump accounts (also called 530A accounts) aim to kickstart retirement savings, says Brandon Davies, a cross-border financial planner in Edmonton who is certified in both Canada and the U.S.
To qualify for a Trump account, the child generally must be under age 18 and have a valid Social Security number, he notes. The child does not have to reside in the U.S.
A one-time $1,000 contribution from the U.S. federal government is available for eligible Trump accounts set up for children born between 2025 and 2028, he adds.
Although older children don’t qualify for the government grant, parents can contribute a maximum of US$5,000 a year to their child’s Trump account.
The money can be held in eligible, low-cost U.S. index funds and grows on a tax-deferred basis. Once the child turns 18, the account becomes subject to the same tax rules as a traditional individual retirement arrangement (IRA).
U.S. Treasury data show more than 6.5 million children have a Trump account, with 1.4 million of those eligible for the US$1,000 contribution. There’s no data available about the country in which the children reside.
Mr. Davies has fielded several inquiries from clients about Trump accounts. Questions are mainly about eligibility and whether these are legitimate accounts.
For now, he cautions most U.S. persons in Canada to think carefully before opening a Trump account. He notes that Canada has not yet provided any special tax treatment for these accounts, meaning investment income and realized capital gains earned inside the account would generally be taxable in Canada while the beneficiary is a Canadian resident.
He notes that, for Canadian tax purposes, interest and dividend income earned in a child’s Trump account may be attributed back to the contributing parent, while realized capital gains are generally taxed in the child’s hands.
“It doesn’t have that same tax advantage effect that you would get if you were on the U.S. side,” Mr. Davies says.
That said, he’s more enthusiastic about Trump accounts for clients with young kids who are returning to the U.S., or those who plan to return and start a family.
Mr. Davies has a client in the former situation. The parents want to set up a Trump account and contribute the maximum US$5,000 a year.
Should the child return to Canada as an adult, the account’s treatment as a traditional IRA may provide greater planning flexibility. Unlike a Trump account, a traditional IRA is generally eligible for treaty-based tax deferral in Canada and may also be converted to a Roth IRA prior to arrival, he notes.
“With a Roth IRA, you can file a one-time election with the Canada Revenue Agency to preserve the Roth IRA’s tax-free growth treatment under the Canada-U.S. Tax Treaty,” Mr. Davies says. “Unfortunately, there is currently no similar treaty election for the Trump account itself.”
Sonya Dolguina, a chartered professional accountant in Vancouver, says Trump accounts could still be advantageous for a U.S.-born child living in Canada.
She notes that the account belongs to the child, with the parents serving as custodians. While the CRA has not provided guidance on the taxation of Trump accounts, it may be considered a taxable account in Canada. The earnings would be the taxable to the child, but still subject to attribution rules.
“If the capital gains are taxed to the child, they might not pay any taxes as all Canadians have a basic personal amount of around $16,000,” Ms. Dolguina says.
Janine Guenther, portfolio manager and senior family wealth advisor at Bellwether Investment Management in Vancouver, also sees Trump accounts as an opportunity to discuss forward planning with cross-border families.
She says opening an account for a newborn who qualifies means “they have 18 more years of compounding available to them,” she says. “It’s an attractive way for people to own financial assets earlier in their lives.”
She notes that U.S. employers can also contribute to an employee’s child Trump account as an incentive to attract and retain employees. The contributions are tax-deductible for the employers.
Clark Linton, portfolio manager and senior wealth advisor at Raymond James in Vancouver, notes that Trump accounts are intended to be long-term growth vehicles, citing the 10 per cent penalties assessed for early withdrawals. He says exceptions would be for things such as education, starting a business or buying a home.
Trump accounts can be opened by filing IRS Form 4547.