Introduction And Purpose
As the article referenced in the above tweet makes clear, a very small percentage of Canadians can expect their retirements to be funded by pensions. The message is that individuals have an obligation to themselves and to their families to engage in responsible financial and retirement planning. The tax laws in every country have provisions in their tax codes to facilitate this planning. Almost all of these planning vehicles are based on “before tax” advantaged vehicles (RRSP or Conventional IRA) or “after tax” vehicles (TFSA or ROTH IRA) which allow for tax free growth.
US citizens living overseas naturally invest in foreign investment vehicles as that’s where they live. With it may come some bad surprise, a punitive taxation regime that can sidetrack you if not planned. Anyone who has made investment outside the USA or is considering making an investment in foreign companies, it is important for him/her to understand associated tax obligations. This blog post covers a summary of US tax rules related to passive foreign investment companies or PFIC. The PFIC rules apply to US persons i.e. individuals, corporations, estates and trusts who are US residents or US citizens.
So, what is a PFIC and why should you care about it?
Congress dislikes the idea that taxpayers would be able to defer income, especially when it comes to foreign investment vehicles. As such, it created a very punitive excess distribution regime, taxing income at the maximum tax rate and adding interest to it.
A relief was that it allowed US persons to treat income earned through PFICs in the same way as the income through US mutual funds is treated, which would be a QEF election. Or alternatively on a mark-to-market basis, which would be a mark-to-market election.
I have written many posts that include a discussion of PFICs. This post has been motivated by a post by Karen Alpert at “Fix The Tax Treaty” (well it can’t really be fixed). The post focuses on the use of “non-U.S. mutual funds” in retirement planning. The post is written from the perspective that “non-U.S. mutual funds” ARE PFICs. Read More
One of the major economic fallouts of last year’s Brexit referendum was the sudden and significant depreciation of the British pound. Over the past week, the pound fell sharply again following the unexpected results of the most recent U.K. election.
What does this mean from a tax perspective for U.S. expats living in the U.K.?
U.S. citizens (or even green cardholders) resident in Canada who are contributors (or a joint contributor) to their children’s RESP (Registered Educational Savings Plan) may have U.S. reporting issues.
If you are a U.S. expat that has invested or is considering investing in foreign mutual funds, there are a number of serious U.S. tax considerations that you should take into account. These considerations stem mainly from the characterization of most foreign mutual funds as so-called “PFICs” for U.S. tax purposes. They also stem from the fact that, with the advent of FATCA, the IRS is paying closer attention to foreign investments by U.S. persons. In this blog, we introduce you briefly to the world of PFICs and point out some of the specific tax issues associated with PFIC status:
Prologue: Tweet by Citizenship Lawyer – @expatriationLaw – Video: Carrick Talks Money: The tax issues facing Americans who sell Canadian homes fw.to/qZwKS8i – No tax free capital gain
If (U.S. Person) then (Mr. #FBAR Ms. #PFIC and Uncle #FATCA) = Few investment and financial planning opportunities).
Yes, it’s true. There are only three things that Americans abroad can “invest in” that do not Read More
On October 18, 2011 the U.S. Ambassador to Canada – Ambassador Jacobson – made a speech on “U.S. Canada Relations” to the Canadian club. The speech took place after the frightening summer of 2011 during which thousands of Canadians:
1 Learned that they might be considered to be U.S. citizens;
2. Learned that they might be required to file U.S. taxes;
3. Made attempts to file those taxes (often through the 2011 “OVDI” program).
Americans abroad throughout the world were living in a
“state of fear and confusion” sheer terror. Read More
The PFIC regime was not introduced until 1986. Prior to 1986, U.S. taxation of foreign corporations was strictly tied to control of the corporation held by U.S. persons. This allowed not only the foreign mutual fund to avoid U.S. taxation, but also U.S. persons who invested in the fund. How so?
For starters, the fund itself avoided U.S. taxation because it was a foreign corporation that derived only foreign-source income. The fund was able to avoid the taint of being classified as a controlled foreign corporation, or “CFC” because it was owned by a large number of U.S. and foreign investors, each of whom owned a relatively small percentage.
U.S. investors avoided U.S. taxation in two primary ways. First, the fund paid no dividends. Read More
In Notice 2014-28, 2014-18 IRB, IRS has announced that it will amend the regs under Code Sec. 1291 to provide that a U.S. person that owns stock of a passive foreign investment company (PFIC) through a tax-exempt organization or account will not be treated as a shareholder of the PFIC. Code Sec. 1291 imposes a special tax and interest charge on a U.S. person that is a shareholder of a PFIC and receives an excess distribution (defined in Code Sec. 1291(b) from the PFIC or recognizes gain derived from a disposition of the PFIC that is treated as an excess distribution under Code Sec. 1291(a)(2). Code Sec. 1298(a) sets forth attribution rules that treat a U.S. person as the owner of PFIC Read More
What is a PFIC?
A PFIC is a so-called “Passive Foreign Investment Company” which is defined to include any foreign (non-US) corporation if 75% or more of its gross income for the year consists of “passive income” (“income test”), or (2) at least 50% of the average fair market value of its assets during the year are assets that produce or are held for the production of passive income (“asset test”). Passive income generally includes dividends, interest, rents, royalties, most foreign currency and commodity gains, and capital gains from assets that produce such income. As pointed out in my earlier tax blog post just about all of the income of a foreign fund will usually qualify as passive and so, nearly all foreign funds will qualify as PFICs. Read More