What investments are appropriate for a USC in Canada

quickcanuck · Post by **quickcanuck** » Wed Aug 17, 2011 7:47 pm

As an "accidental American" I have just gone through the process of filing returns with the IRS for last few years and have discovered the agony of PFIC's, FBAR's and 3520's, so I know that my existing Canadian Mutual Funds are going to be sold, and I need to find investments that are more "IRS friendly" that can be bought and sold through Canadian discount brokers to a USC resident in Canada. What investments can I buy that fit the dual taxation reporting model, and which can be traded online in Canada?

nelsona · Post by **nelsona** » Thu Aug 18, 2011 5:38 am

US traded stocks and US traded ETFs. GICs.

patti · Post by **patti** » Mon Aug 22, 2011 10:58 pm

It is my understanding that the vast majority of Canadian traded stocks are also fine.

nelsona · Post by **nelsona** » Tue Aug 23, 2011 5:49 am

That has yet to be determined. And this would only be if the comapny specifically states that it is not PFIC.

madhoa · Post by **madhoa** » Tue Aug 23, 2011 6:41 am

Isn't it sufficient if the company clearly does not meet the income test (75% passive) or the asset test (50% passive) ? Most large Canadian clearly companies do not fall into that category. (there is a special exemption for banks etc. to prevent them from being designated as PFICs)

nelsona · Post by **nelsona** » Tue Aug 23, 2011 6:45 am

Again, the company would need to specifically state this, in my opinion.

patti · Post by **patti** » Tue Aug 23, 2011 8:11 pm

I have looked at lots of financial reports/filings to try to determine the answer to this question. The best any Canadian company ever gives (even those that are interlisted in Canada and US) is some weasel-worded statement along the lines of, "We do not believe that we are a PFIC nor have we been a PFIC in the past, nor do we expect to be a PFIC in the future. However, that is a complex factual determination each year. We cannot assure you that the IRS will not decide we are indeed a PFIC. Please consult your tax advisor."

I'm no expert, but I think that unless the company actually determines and states that they *are* a PFIC, the burden of proof would be on the IRS.

nelsona · Post by **nelsona** » Wed Aug 24, 2011 6:04 am

Nice thought patti, but in the IRS world, the burden of prrof in NEVER with them, unfortunately.

madhoa · Post by **madhoa** » Wed Aug 24, 2011 9:47 am

The vast majority of non US companies (companies traded only on foreign stock exchanges, without ADRs) couldn't spell PFIC, let alone go to the trouble of determining whether they are a PFIC. I don't think it was the intent of Congress to essentially prevent Americans from investing in bona-fide overseas companies unless these companies are willing to check whether they are PFICs or not. The intent was to prevent Americans from converting income tax into capital gains taxed at lower rates and to prevent indefinite deferral of income by using foreign jurisdiction laws (and also to prevent a competitive disadvantage for American mutual funds/ETFs, since those are required to pass through all earnings to maintain their tax status).

I think that investing in large, well traded companies that clearly do not seem to be PFICs after looking at their balance sheets and earning statements is fine. The only gotchas might be for mining companies or startups that derive the bulk of their income from passive investments (there is a sage harbor for startups, but its only for a short duration).

nelsona · Post by **nelsona** » Wed Aug 24, 2011 12:33 pm

"I don't think it was the intent of Congress to essentially prevent Americans from investing in bona-fide overseas companies ..."

Really, I would argue that that was one of their primary motives.

Its the IRS that is using this to extrxct more taxes, but Congress (which would never admit to raising taxes, would they?) is protectionist currently.

madhoa · Post by **madhoa** » Fri Aug 26, 2011 7:11 am

The legislative history of the PFIC rules (first passed in 1986) indicates that the US Congress was specifically concerned about people using foreign hedge funds. mutual funds etc. to convert income into capital gains, and defer recognition. There is no indication that the idea was to prevent Americans from buying general foreign stocks. There are special exemptions in the statute for foreign banks, insurance companies and for startups that might otherwise be classified as PFICs because they meet the 'income' or 'asset' test.

Now, its not that the IRS might not try to classify pretty much any non US company that has not certified that it is a PFIC as one for the sake of generating tax revenue. But I have not heard of that happening. So I think its safe to buy companies whose earnings reports indicate clearly that they are not a PFIC. Startups and small mining companies with a lot of passive income and few operating earnings are the main cases where caution is warranted.

patti · Post by **patti** » Fri Aug 26, 2011 11:24 am

Hi madhoa - I completely agree with your assessment. Mainstream large-cap Canadian companies should be fine.

The other area that can be a bit grey are Canadian REITs. My understanding here is that they are considered corporations and not trusts by the US (and therefore do not require form 3520). The determination on whether they are PFICs depends on whether the REIT does their property management "in house" or outsources that to another company. If they do their own property management, then the rental income is from actively managing their business and, therefore, not not passive in nature. I think most (but not all) Canadian REITs should be okay. It's an area where you'd want to be careful, so definitely search the REIT's filings to see how they manage the property.