Cardinal Point Wealth Management

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U.S. Tax Residents: How to Navigate PFIC Investment Rules

PFICs first became recognized through tax reforms passed in 1986. The changes were designed to close a tax loophole, which some U.S. taxpayers were using to shelter offshore investments from taxation. The instituted tax reforms not only sought to close this tax avoidance loophole and bring such investments under U.S. taxation but also to tax such investments at high rates, to discourage taxpayers from following this practice.

PFIC Rules

Typical examples of PFICs include foreign-based mutual funds and startups that exist within the scope of the PFIC definition. Foreign mutual funds typically are considered PFICs if they are foreign corporations that generate more than 75% of their income from passive sources, such as capital gains and dividends.

Investments designated as PFICs are subject to strict and extremely complicated tax guidelines by the Internal Revenue Service, delineated in Sections 1291 through 1298 of the U.S. income tax code.

The PFIC itself, as well as shareholders, is required to maintain accurate records of all transactions related to the PFIC, such as share cost basis, any dividends received, and undistributed income that the PFIC may earn. Learn everything you need to know about PFICs by downloading our white paper here.

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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.