Hi all,
I have been trying to come up with a tax-efficient investing strategy for US Citizens who are resident in Canada. Due to the PFIC rules, as well as the mutual FX gain rules on both sides of the border, this seems like a very thorny situation.
If I have parsed the regulations (and previous forum posts) correctly, it seems that the US considers CAD$ to be "property", and that any time you sell [b]or buy[/b] any investment denominated in CAD, you have to record a FX gain or loss (measured in USD) for both the buy and the sell based on your "cost" for acquiring the CAD.
Similarly, my understanding is that CRA also treats US$ as property, so if you are investing in US$, you also get to FX both your buy and your sell (measured in CAD).
This seems like a horrible catch-22, since no matter which currency you invest in, the "other" taxing agency will potentially be able to tax you on the buy and the sell. It's entirely possible to make no "real" money on the underlying currency of the transaction, but still pay taxes twice to the "other" taxing agency. And since you'll be recording gains in one country based on the FX rate, it seems likely that you will have no offsetting FTC from the other side because no FX gain will be reported in the base currency.
* Situation: cash investments
If you want a cash or cash-like investment in your portfolio, what do you hold, and what currency do you keep it in?
My reading of CRA IT95R suggests that US gov't T-bills, or anything else that is negotiable, is considered to be foreign property and suffers the above FX problem, both at the purchase and at maturity. I didn't read into the US side of the law that closely, but I can't imagine that they would make any exception for Canadian assets, so I assume that the situation is similar for GICs and so on.
If I were to buy a T-bill or a GIC, it seems very likely that the FX gain/loss would wipe out any potential increase in yield--and this could seemingly incur a taxable event as soon as I bought the T-bill or GIC, depending on my acquisition cost of the currency I used to buy it. And even if that did not cause a taxable event, I would still be subject to FX gains when I sell it or it matures, if the underlying currency appreciated in the eyes of the other country.
The goal with cash savings would be to improve upon the miniscule interest rate offered by bank accounts, but it seems like bank accounts are really the only way to go here because they pay interest without incurring any FX gains.
Are there any other decent options? Potentially a US-based money market ETF? There is still a FX problem at purchase and at sale, but at least it doesn't roll over on a fixed date like treasury bills, so you can buy-and-hold for as long as you need.
* Situation: Non-cash investments
Due to the need to FX on both the buy and the sell in two independent currencies, it seems like only a passive investing strategy is practical from a taxation point of view (or else you'll tear your hair out trying to manage P&L in two currencies--of course you still need track both anyway, but it's complicated and you don't want to be making trades every week).
Unfortunately, most Canadian mutual funds are effectively off-limits due to PFIC rules. I can't buy US mutual funds since I am not a US resident. This seems to leave: individual Canadian stocks, individual US stocks, and US ETFs.
Individual stocks do not seem generally diversified enough to hold in a portfolio with a passive management strategy (and if they were diversified, I would want to investigate if they were PFICs). So we take Canadian stocks off the table.
This limits me to individual US stocks and US ETFs, so it looks like I have to keep the bulk of my investments in USD. It's certainly possible to build a passive portfolio using US ETFs, and absent any better options, this is what I will likely end up doing.
Has anyone else figured out any better options?
* Idea: CCPC with functional currency election
I've seen that CRA permits corporations to make a "functional currency election", such that their books and income is measured in a different currency (such as USD), and only their year-end USD net gain or loss is converted to CAD at tax time. This obviously comes with setup and ongoing compliance costs, and it still doesn't open up the world of Canadian mutual funds, but might this be one way to sidestep the dual-currency FX problem since you only record gains or losses in USD? (It seems that "investment corporations" do not qualify to make this election, but I haven't been able to find the definition of exactly what constitutes an "investment" corporation.)
Other than that, does anyone else have any creative ideas?
- NHL
Investment options for US Citizens resident in Canada
Moderator: Mark T Serbinski CA CPA
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nohairleft
- Posts: 32
- Joined: Tue Mar 04, 2014 12:16 am
Hi,
If you do a search on other posts, you can find a list of canadian mutual fund and ETF companies which offer PFIC statements to allow the QEF election. The QEF election in most cases is very tax efficient - the only drawback is that dividends are not qualified, even if the original dividend from the underlying invests was US sourced.
Here is a tax efficient "Canadian Couch Potato" type investment for the US citizen in Canada:
1. Canadian Equity: RBF556 - RBC Canadian index fund. They recently started offering PFIC statements, for QEF elections.
An alternate Canadian Equity ETF is QCAN or EWC. These are US domiciled ETFs investing in Canada.
2. US Equity: No problem - there are tones of US domiciled ETFs investing in the US. My favourites are RSP, ITOT, SCHV, and SCHD.
3. International equity: Many US domiciled ETFs for international investment. IEFA - is a good one for the MSCI internation index.
4. Canadian bonds. One QEF option is the RBC Bond Fund. However, since bond investments produce interest income only, and on average, no capital appreciation, the PFIC mark to market election will not likely result in more tax. It is possible to realize a capital gain with bonds, but less likely.
These are my suggestions.
If you do a search on other posts, you can find a list of canadian mutual fund and ETF companies which offer PFIC statements to allow the QEF election. The QEF election in most cases is very tax efficient - the only drawback is that dividends are not qualified, even if the original dividend from the underlying invests was US sourced.
Here is a tax efficient "Canadian Couch Potato" type investment for the US citizen in Canada:
1. Canadian Equity: RBF556 - RBC Canadian index fund. They recently started offering PFIC statements, for QEF elections.
An alternate Canadian Equity ETF is QCAN or EWC. These are US domiciled ETFs investing in Canada.
2. US Equity: No problem - there are tones of US domiciled ETFs investing in the US. My favourites are RSP, ITOT, SCHV, and SCHD.
3. International equity: Many US domiciled ETFs for international investment. IEFA - is a good one for the MSCI internation index.
4. Canadian bonds. One QEF option is the RBC Bond Fund. However, since bond investments produce interest income only, and on average, no capital appreciation, the PFIC mark to market election will not likely result in more tax. It is possible to realize a capital gain with bonds, but less likely.
These are my suggestions.
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MGeorge is neither an accounting nor taxation professional.
MGeorge is neither an accounting nor taxation professional.
Hi Again, I just realized I forgot to give a word of caution about using US domiciled ETFs to invest in Canada.
If you held QCAN or EWC (US based ETF investing in Canada) in a Canadian taxable investment account, you won't be able to get the preferential Canadian Eligible dividend tax treatment. The dividends will be treated as US dividends since the "flow through" is lost. In this case your better off with RBF556 and it's QEF treatment. If you like actively managed mutual funds (I don't). There are several that offer QEF statements now. Fidelity, Clarington, MacKenzie to name a few.
Cheers!
If you held QCAN or EWC (US based ETF investing in Canada) in a Canadian taxable investment account, you won't be able to get the preferential Canadian Eligible dividend tax treatment. The dividends will be treated as US dividends since the "flow through" is lost. In this case your better off with RBF556 and it's QEF treatment. If you like actively managed mutual funds (I don't). There are several that offer QEF statements now. Fidelity, Clarington, MacKenzie to name a few.
Cheers!
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MGeorge is neither an accounting nor taxation professional.
MGeorge is neither an accounting nor taxation professional.
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nohairleft
- Posts: 32
- Joined: Tue Mar 04, 2014 12:16 am
Hi MGeorge,
Thanks for your detailed reply!
1. Investing in Canadian funds with QEF elections
I admit that I have avoided Canadian mutual funds (even those with QEF options) after being scared off by reading about the hassles of the PFIC forms.
For those of you who have QEF-reporting funds, how long does it take you to complete the PFIC forms when you file your returns? Even if the tax hit is comparable to a US-domiciled mutual fund, I am already spending way too much time on compliance and I don't want to make my life that much more complicated.
2. Using US ETFs to invest in Canada
In terms of Mgeorge's comments on using US ETFs to invest in Canada (which I agree is a bad idea):
In addition to losing out on the preferential eligible dividend tax treatment you mentioned, don't you also lose out on "foreign" taxes? For example, I imagine that the US-domiciled ETF would pay withholding taxes to Canada on any dividends that are distributed by its Canadian components to it (as a US entity). But from there, I imagine that Canada would not allow a FTC on taxes paid to itself, right?
3. Cash Investments Options for dual-citizens
Since my original post, I have found an interesting potential solution for holding cash (particularly US$ denominated funds). I found that TD offers a "fund" called the TD Investment Savings Account (TDB8152). Although it's grouped into the fund category in terms of information display, and even though it settles T+1 just like a money market fund, the literature is emphatic that it is *not* a mutual fund and that it is a deposit at a Canadian bank.
It's available in both CAD and USD. For the USD version, since this is a deposit account, my (non-professional!) reading of CRA IT95R is that it would still be considered funds "on deposit", such that moving foreign currency assets into or out of it would not trigger any FX gains or losses. In addition, since it's not a mutual fund, it does not seem like it would trigger PFIC reporting.
One reason I was looking at this was in order to contribute some USD funds directly into my RRSP. The only way I can seem to do this is via an in-kind transfer (since raw US$ themselves cannot be transferred). I was scratching my head trying to find a way to find a "safe" asset that I could use to transfer the US$ into the RRSP without substantial investment risk, incurring PFIC wrath, etc., so this looks like a good fit.
I admit that the interest rates aren't fantastic, but they are better than nothing. It looks like it solves the RRSP contribution problem, and it gives me a place to park cash without having to separately transfer it to a USD savings account.
Thanks for your detailed reply!
1. Investing in Canadian funds with QEF elections
I admit that I have avoided Canadian mutual funds (even those with QEF options) after being scared off by reading about the hassles of the PFIC forms.
For those of you who have QEF-reporting funds, how long does it take you to complete the PFIC forms when you file your returns? Even if the tax hit is comparable to a US-domiciled mutual fund, I am already spending way too much time on compliance and I don't want to make my life that much more complicated.
2. Using US ETFs to invest in Canada
In terms of Mgeorge's comments on using US ETFs to invest in Canada (which I agree is a bad idea):
In addition to losing out on the preferential eligible dividend tax treatment you mentioned, don't you also lose out on "foreign" taxes? For example, I imagine that the US-domiciled ETF would pay withholding taxes to Canada on any dividends that are distributed by its Canadian components to it (as a US entity). But from there, I imagine that Canada would not allow a FTC on taxes paid to itself, right?
3. Cash Investments Options for dual-citizens
Since my original post, I have found an interesting potential solution for holding cash (particularly US$ denominated funds). I found that TD offers a "fund" called the TD Investment Savings Account (TDB8152). Although it's grouped into the fund category in terms of information display, and even though it settles T+1 just like a money market fund, the literature is emphatic that it is *not* a mutual fund and that it is a deposit at a Canadian bank.
It's available in both CAD and USD. For the USD version, since this is a deposit account, my (non-professional!) reading of CRA IT95R is that it would still be considered funds "on deposit", such that moving foreign currency assets into or out of it would not trigger any FX gains or losses. In addition, since it's not a mutual fund, it does not seem like it would trigger PFIC reporting.
One reason I was looking at this was in order to contribute some USD funds directly into my RRSP. The only way I can seem to do this is via an in-kind transfer (since raw US$ themselves cannot be transferred). I was scratching my head trying to find a way to find a "safe" asset that I could use to transfer the US$ into the RRSP without substantial investment risk, incurring PFIC wrath, etc., so this looks like a good fit.
I admit that the interest rates aren't fantastic, but they are better than nothing. It looks like it solves the RRSP contribution problem, and it gives me a place to park cash without having to separately transfer it to a USD savings account.
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nohairleft
- Posts: 32
- Joined: Tue Mar 04, 2014 12:16 am
[quote="nelsona"]2. Any US tax on the ETF would be credited on your Cdn return against the Cdn tax.[/quote]
To be clear, assuming a US-entity ETF holding Canadian stocks:
The owner of the stocks (the US ETF) is foreign, so wouldn't Canada apply a withholding tax on the dividends paid to the ETF?
However, since that withholding was levied against the ETF and not me, is it really possible for me to deduct it on my Canadian return as you wrote above?
To be clear, assuming a US-entity ETF holding Canadian stocks:
The owner of the stocks (the US ETF) is foreign, so wouldn't Canada apply a withholding tax on the dividends paid to the ETF?
However, since that withholding was levied against the ETF and not me, is it really possible for me to deduct it on my Canadian return as you wrote above?
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nohairleft
- Posts: 32
- Joined: Tue Mar 04, 2014 12:16 am
Yes this is a tricky one. I think the way it plays out is that the US domiciled ETF, which invests in Canada, would not have any "flow-through" characteristic for Canadian tax purposes. The CRA would view it as nothing more than a US stock that pays dividends. So as nelsona said, CRA would consider that you paid US tax on it.
Many people buy US domiciled ETFs to invest in Europe and the far east - it works fine.
Many people buy US domiciled ETFs to invest in Europe and the far east - it works fine.
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MGeorge is neither an accounting nor taxation professional.
MGeorge is neither an accounting nor taxation professional.
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nohairleft
- Posts: 32
- Joined: Tue Mar 04, 2014 12:16 am
Doesn't this come down to a question of whether a "distribution" of foreign taxes paid by the US ETF is recognized by CRA as a distribution as such?
It seems like that strategy would work OK for Europe/Asia funds: if the ETF distributed its foreign taxes paid to shareholders, they would remain "foreign" taxes from either a US or Canadian point of view. I know that distributing FTCs is common with mutual funds, and it looks like at least some ETFs do this type of distribution too (eg. https://advisors.vanguard.com/VGApp/iip ... ntaxcredit).
But if a US-domiciled ETF invests in Canada and distributes its "foreign" taxes (which were paid to Canada!) to a Canadian owner, the taxes would not seem to be foreign from a Canadian point of view.
It seems like that strategy would work OK for Europe/Asia funds: if the ETF distributed its foreign taxes paid to shareholders, they would remain "foreign" taxes from either a US or Canadian point of view. I know that distributing FTCs is common with mutual funds, and it looks like at least some ETFs do this type of distribution too (eg. https://advisors.vanguard.com/VGApp/iip ... ntaxcredit).
But if a US-domiciled ETF invests in Canada and distributes its "foreign" taxes (which were paid to Canada!) to a Canadian owner, the taxes would not seem to be foreign from a Canadian point of view.
Hi nohairleft,
I think we agree on this one. Let's say a US citizen, in Canada invests in QCAN. QCAN generates $100 of Canadian source dividends.
QCAN pays Canada $15, then pays you $85.
QCAN sends you a 1099-div showing a $100 distribution, and the box that allows you to claim a $15 foreign tax credit. Let's assume your effective US tax rate on qualified dividends is 10% (line 18 adjustment on 1116, etc). For US purposes you carry forward $5 of FTC.
For Canadian tax purposes, you've received an $85 dividend considered to be of US source. You pay, say 50% tax on $85, and you take a foreign tax credit for the $10 you paid to the US.
A non-US citizen resident of Canada would only receive a $72.25 dividend, and would be able to claim the $12.75 FTC on their return since the brokerage would withold 15% of $85.
It is sort of like the dividend gets double taxed. We both agree, not a good idea. But QCAN works great in TFSAs. I'm doing it at the moment.
I think we agree on this one. Let's say a US citizen, in Canada invests in QCAN. QCAN generates $100 of Canadian source dividends.
QCAN pays Canada $15, then pays you $85.
QCAN sends you a 1099-div showing a $100 distribution, and the box that allows you to claim a $15 foreign tax credit. Let's assume your effective US tax rate on qualified dividends is 10% (line 18 adjustment on 1116, etc). For US purposes you carry forward $5 of FTC.
For Canadian tax purposes, you've received an $85 dividend considered to be of US source. You pay, say 50% tax on $85, and you take a foreign tax credit for the $10 you paid to the US.
A non-US citizen resident of Canada would only receive a $72.25 dividend, and would be able to claim the $12.75 FTC on their return since the brokerage would withold 15% of $85.
It is sort of like the dividend gets double taxed. We both agree, not a good idea. But QCAN works great in TFSAs. I'm doing it at the moment.
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MGeorge is neither an accounting nor taxation professional.
MGeorge is neither an accounting nor taxation professional.
How about this. If QCAN knows you are Cdn resident (your broker certainly does) would not your Cdn tax merely be reported as such on your Cdn return, with all other Cdn tax that was witheld by payors?
After all QCAN sent $15 to CRA (in your name?)
Your broker is going to issue you some type of T-form, which should report this tax that you paid as Cdn tax, no?
No need for foreign tax credit on tax paid to canada.
After all QCAN sent $15 to CRA (in your name?)
Your broker is going to issue you some type of T-form, which should report this tax that you paid as Cdn tax, no?
No need for foreign tax credit on tax paid to canada.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
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nohairleft
- Posts: 32
- Joined: Tue Mar 04, 2014 12:16 am
[quote="nelsona"]How about this. If QCAN knows you are Cdn resident (your broker certainly does) would not your Cdn tax merely be reported as such on your Cdn return, with all other Cdn tax that was witheld by payors?
After all QCAN sent $15 to CRA (in your name?)
Your broker is going to issue you some type of T-form, which should report this tax that you paid as Cdn tax, no?
No need for foreign tax credit on tax paid to canada.[/quote]
As a US ETF, I would assume that QCAN is constructed either as a US C corporation or a US trust (eg. http://www.icifactbook.org/fb_appa.html#organization). In either case, that entity is the one paying the withholding tax and not me. Is there some CRA code or tax treaty section that allows the nonresident withholding tax paid by a foreign trust or corporation to get claimed back as tax paid by a different entity?
2015 is my first year holding US-based ETFs with a Canadian broker, so I don't know the answer to the T-form question...nor do I expect to be investing in any US ETFs that invest in Canada any time in the future. But for the theoretical question, my rampant speculation goes something like this:
Do we expect QCAN, which is a US entity that probably doesn't care about the CRA at all, to prepare special information for Canadian brokers and their clients (versus their majority base of US investors, who also don't care) about taxes specifically paid to Canada on a per-dividend basis?
What if QCAN were a worldwide investment fund that had 2% of income from Canada, 1.5% from Bolivia, 1% from Estonia, ad infinitum? Does the fund break it down in a structured format so that they can provide to the foreign brokers all over the world so that clients can reclaim their withholding taxes?
Even if the funds don't do it, maybe this information can all be gleaned from public fund documents so that the Canadian brokers could calculate it themselves, but there are thousands of funds out there, which makes me doubtful...
After all QCAN sent $15 to CRA (in your name?)
Your broker is going to issue you some type of T-form, which should report this tax that you paid as Cdn tax, no?
No need for foreign tax credit on tax paid to canada.[/quote]
As a US ETF, I would assume that QCAN is constructed either as a US C corporation or a US trust (eg. http://www.icifactbook.org/fb_appa.html#organization). In either case, that entity is the one paying the withholding tax and not me. Is there some CRA code or tax treaty section that allows the nonresident withholding tax paid by a foreign trust or corporation to get claimed back as tax paid by a different entity?
2015 is my first year holding US-based ETFs with a Canadian broker, so I don't know the answer to the T-form question...nor do I expect to be investing in any US ETFs that invest in Canada any time in the future. But for the theoretical question, my rampant speculation goes something like this:
Do we expect QCAN, which is a US entity that probably doesn't care about the CRA at all, to prepare special information for Canadian brokers and their clients (versus their majority base of US investors, who also don't care) about taxes specifically paid to Canada on a per-dividend basis?
What if QCAN were a worldwide investment fund that had 2% of income from Canada, 1.5% from Bolivia, 1% from Estonia, ad infinitum? Does the fund break it down in a structured format so that they can provide to the foreign brokers all over the world so that clients can reclaim their withholding taxes?
Even if the funds don't do it, maybe this information can all be gleaned from public fund documents so that the Canadian brokers could calculate it themselves, but there are thousands of funds out there, which makes me doubtful...
Hi nelsona,
I've only ever received 1099-DIVs from my Cdn broker for US dividends. An investment in QCAN gives a 1099-DIV.
I get T5s for my Canadian dividends/interest only.
I spoke to a coworker, non-US citizen, and he says all of this investments Canadian and US are reported to him on T5s and T3s.
I don't think QCAN knows about me, and I don't believe I could claim that the $15 was paid to the CRA in my name. I think it is lost.
One thing for sure, the brokerage treats W9 account holders and W8BEN holders different with respect to tax information slips.
The 1099divs will have foreign income and foreign taxes paid boxes filled in. One could try to claim this on a Canadian return that in this case "foreign taxes" is Canadian taxes for QCAN. I thought the "flow through" fails for foreign investment funds - in the same way we can't treat US dividends from a PFIC as being US sourced. The ~$10 liability for US taxes would be creditable on the Canadian return - the CRA expects "normal Canadians" to have paid 15% to the US for this dividend. SUre, it could be argued that I really didn't pay $10 because of the foreign tax credit the US granted me on 1099-div, but it would be inconsistant for the CRA to consider the dividend US sourced, then deny the credit.
I'm interested in this topic - but I think for practical purposes, a QEF eligible canadian domiciled index fund is the better way to go in taxable accounts due to the eligible dividend treatment.
I've only ever received 1099-DIVs from my Cdn broker for US dividends. An investment in QCAN gives a 1099-DIV.
I get T5s for my Canadian dividends/interest only.
I spoke to a coworker, non-US citizen, and he says all of this investments Canadian and US are reported to him on T5s and T3s.
I don't think QCAN knows about me, and I don't believe I could claim that the $15 was paid to the CRA in my name. I think it is lost.
One thing for sure, the brokerage treats W9 account holders and W8BEN holders different with respect to tax information slips.
The 1099divs will have foreign income and foreign taxes paid boxes filled in. One could try to claim this on a Canadian return that in this case "foreign taxes" is Canadian taxes for QCAN. I thought the "flow through" fails for foreign investment funds - in the same way we can't treat US dividends from a PFIC as being US sourced. The ~$10 liability for US taxes would be creditable on the Canadian return - the CRA expects "normal Canadians" to have paid 15% to the US for this dividend. SUre, it could be argued that I really didn't pay $10 because of the foreign tax credit the US granted me on 1099-div, but it would be inconsistant for the CRA to consider the dividend US sourced, then deny the credit.
I'm interested in this topic - but I think for practical purposes, a QEF eligible canadian domiciled index fund is the better way to go in taxable accounts due to the eligible dividend treatment.
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MGeorge is neither an accounting nor taxation professional.
MGeorge is neither an accounting nor taxation professional.