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New Rules for U.S. Taxpayers in Canada with Mutual Funds

January 23, 2014 By Cardinal Point Wealth

This article by Cardinal Point’s Terry Ritchie and James Sheldon discusses important new rules for U.S. taxpayers who hold Canadian mutual funds in non-registered accounts. The IRS recently released temporary regulations regarding Passive Foreign Investment Companies (PFICs). This act impacts nearly all Canadian mutual funds and Canadian-traded ETFs held outside registered accounts.

As a result of FATCA, U.S. citizens who hold PFICs must “file an annual report containing information as may be required by the Treasury Secretary,” which includes U.S. taxpayers living in Canada. They must file IRS Form 8621 and take one of two elections: Qualified Electing Fund (QEF) or Mark-to-Market Election. The new disclosure requirements may reveal U.S. taxpayers in Canada who haven’t filed IRS Form 8621 with their annual U.S. tax returns. U.S.- and dual-citizens in Canada are advised to discuss these issues with their advisors and prepare for the changes in tax compliance and any enforcement implications.

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

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

Should Snowbirds Live in the U.S.?

May 17, 2013 By Cardinal Point Wealth

Cardinal Point’s Terry Ritchie looks at new measures to promote longer stays by Canadians in the U.S. The first proposal would let Canadians stay in the U.S. for up to 240 days per year, as long as they are 55 years or older, maintain a Canadian residence, and own/rent property in the U.S. Another provision would allow a Canadian to live in the U.S. for up to three years with a special Z Visa if he/she is over 55, purchases U.S. property for at least $500K (USD), has health insurance, and lives in the U. S. for more than six months. For both provisions, the Canadian could bring a spouse, but could not work in the U.S. For those already owning U.S. real estate, the Z Visa would not apply.

img1It’s also important to consider the income tax, estate tax, and health care implications of these measures. Consider the rules that relate to establishing U.S. tax residency, such as the Substantial Presence Test. Under this test, snowbirds who spend more than 183 days in the U.S. over a three-year-period are subject to U.S. income tax on their worldwide income. Those that meet this test can file IRS Form 8840 so they aren’t subject to U.S. tax, but U.S. tax residents must file IRS compliance forms when they own Canadian companies, bank accounts, investments, and retirement accounts or risk substantial penalties. The article also discusses rules for Canadian mutual funds, RRSPs, RRIFs, and new foreign asset reporting requirements.

What are the implications for U.S. estate taxes? Under the new rules, a Canadian could be subject to U.S. estate taxes on his worldwide estate, including all assets in Canada. The article provides a recent estate tax case to illustrate this. In terms of health care coverage, Canadians who are away from their province of residency for more than 182 days (some provinces vary) may lose coverage, and finding an alternative form may be challenging.

Read the full article here.

As always, we understand that U.S. Canadian Cross-Border issues can be be a challenge to understand, we are here to answer any cross-border wealth management questions you may have.

Filed Under: Articles, Canadian Snowbirds, Cross-border Tax Planning, Cross-border Transition Planning Tagged With: Canadian Snowbirds, Canadians Moving to U.S., Cross-border tax planning, PFIC, Transition Planning

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“Cardinal Point” is the brand under which dedicated professionals within Cardinal Point Capital Management, ULC provide financial, tax and investment advisory, risk management, financial planning and tax services to selected clients. Cardinal Point Capital Management, ULC is a US 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 Cardinal Point and its representatives are properly registered or exempt from registration. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.