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How US PFIC Rules Can Impact Your Clients

May 23, 2013 By Cardinal Point Wealth

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Cardinal Point’s Terry Ritchie discusses the impact of U.S. PFIC (Passive Foreign Investment Company) tax rules on U.S. citizens living in Canada who hold Canadian mutual funds or ETFs. The challenge is that under U.S. tax law, the earnings and dividends from these PFICs are not taxed the same way in the U.S. as they are in Canada, resulting in very high tax rates.

The PFIC rules require the filing of Form 8621 for each PFIC owned. The taxpayer can make one of two elections. The first would be to treat the PFIC as a “qualified electing fund” (QEF). The QEF election lets the taxpayer distinguish between capital gain and ordinary income of the PFIC. However, Ritchie knows of only one Canadian mutual fund company that files the QEF. The second option is the mark-to-market election, in which all the year’s earnings are taxed as ordinary income at the highest marginal tax rate in the U.S. Ritchie’s advice to those in this situation is to avoid holding Canadian mutual funds/ETFs, find the Canadian mutual fund company that offers QEF statements, or own a portfolio of individual securities.

Filed Under: Americans Living in Canada, Articles, Canada-U.S. Financial Planning Articles, Cross-border Tax Planning, Investment Management Articles, Video Tagged With: Americans living in Canada, Canada-U.S. financial planning, Cross-border tax planning, Investment Management, PFIC

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"Cardinal Point" is the brand under which the dedicated professionals within the independent Cardinal Point Group of Companies collaborate to provide financial and investment advisory, risk management, financial planning and tax services to selected clients. Cardinal Point comprises two legally separate companies: Cardinal Point Wealth Management, LLC, a U.S. registered investment advisor and Cardinal Point Capital Management Inc.is a U.S. registered investment advisor and a registered portfolio manager in Canada (ON, QC, MB, SK, NS, NB, AB, BC). Advisory services are only offered to clients or prospective clients where the independent Cardinal Point firms and its representatives are properly registered or exempt from registration. Each firm enters into client engagements independently. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.