I reside in Canada and am a dual-citizen am trying to invest in some ETF's that not considered "PFIC's". Would purchasing shares of an Index from the Toronto Stock Exchange that invest solely in the United States economy be considered a PFIC?
The shares im looking at are VUN and VFV from VanguardCanada. Ive talked to many other forums and even tried calling the IRS and have been unable to find an answer.
Any information would be greatly appreciated...
Passive Foreign Investment Company
Moderator: Mark T Serbinski CA CPA
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speer
You should call them, and share with us what they say. I wouldn't be surprised if they don't know what you're talking about. I once called Ishares Canada and asked them if they were considering providing QEF statements - and the response was a very defensive:
"we have no plans to offer such statements, and we under to obligation to do so."
I'm reasonably sure that any TSX traded ETFs from Vangaurd Canada would be considered PFICs - even if they hold only one US domiciled ETF as the secondary holding. Most Vanguard Canada ETFs that invest in the US, hold one or more US domiciled ETFs - why not buy the US domiciled ETFs directly? These aren't PFICs. In fact, you can make a sensible portfolio on US domiciled ETFs:
EWC - invests in Canada
IVV - invests in the US SP500
IEFA - foreign developed countries
XBB - Canadian bonds (yes a PFIC, but the income is interest anyway, and on average there is no growth in value, so a Mark-to-market election has little/no impact.
Best Regards.
"we have no plans to offer such statements, and we under to obligation to do so."
I'm reasonably sure that any TSX traded ETFs from Vangaurd Canada would be considered PFICs - even if they hold only one US domiciled ETF as the secondary holding. Most Vanguard Canada ETFs that invest in the US, hold one or more US domiciled ETFs - why not buy the US domiciled ETFs directly? These aren't PFICs. In fact, you can make a sensible portfolio on US domiciled ETFs:
EWC - invests in Canada
IVV - invests in the US SP500
IEFA - foreign developed countries
XBB - Canadian bonds (yes a PFIC, but the income is interest anyway, and on average there is no growth in value, so a Mark-to-market election has little/no impact.
Best Regards.
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MGeorge is neither an accounting nor taxation professional.
MGeorge is neither an accounting nor taxation professional.
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speer
Hey MGeroge,
So I contacted Vanguard and the receptionist said they're PFIC compliant and are infact PFIC's (This is after a 'tax professional' at a firm in my city said they would not be considered PFIC's).
Despite how many articles I read about PFIC I still dont fully understand it, nor can I get a simple explanation. From my understanding (and since Vanguard Canada has PFIC reporting) I can make QEF elections (which is good) and I must report them every year and this treats the mutual fund as an American one.
Would you take the liberty to explain in simple laymen terms the mathematical tax implications for QEF's for a mutual fund? Im under the impression that unrealized gains are taxed as ordinary income.
Lastly, what are the implications of me buying ETF's in the states as a dual while in Canada (besides being relived from PFIC)? I believe the only issue is currency conversion is not quite where I want it right now, and every time I want to buy more shares Id have to convert my money to USD (I work in Canada and plan to make regular contributions).
I believe I wont have US withholding taxes anymore for dividends. I wont owe any taxes except on the dividends (which I believe I would report as foreign income and taxed at my highest marginal tax bracket in Canada). I also believe I'd be able to elect tax credits from my US dividend taxes paid against my Canadian tax.
Would there be any restrictions or obligations from Canada for holding foreign investments such as what US does to citizens? I wont have any issus (I believe) besides the ones listed above until I sell my shares (many years from now) which I could be very well be a US resident and not pay any Canadian taxes on it.
So I contacted Vanguard and the receptionist said they're PFIC compliant and are infact PFIC's (This is after a 'tax professional' at a firm in my city said they would not be considered PFIC's).
Despite how many articles I read about PFIC I still dont fully understand it, nor can I get a simple explanation. From my understanding (and since Vanguard Canada has PFIC reporting) I can make QEF elections (which is good) and I must report them every year and this treats the mutual fund as an American one.
Would you take the liberty to explain in simple laymen terms the mathematical tax implications for QEF's for a mutual fund? Im under the impression that unrealized gains are taxed as ordinary income.
Lastly, what are the implications of me buying ETF's in the states as a dual while in Canada (besides being relived from PFIC)? I believe the only issue is currency conversion is not quite where I want it right now, and every time I want to buy more shares Id have to convert my money to USD (I work in Canada and plan to make regular contributions).
I believe I wont have US withholding taxes anymore for dividends. I wont owe any taxes except on the dividends (which I believe I would report as foreign income and taxed at my highest marginal tax bracket in Canada). I also believe I'd be able to elect tax credits from my US dividend taxes paid against my Canadian tax.
Would there be any restrictions or obligations from Canada for holding foreign investments such as what US does to citizens? I wont have any issus (I believe) besides the ones listed above until I sell my shares (many years from now) which I could be very well be a US resident and not pay any Canadian taxes on it.
Hello speer,
I'll do my best to answer your questions. I didn't know Vanguard Canada offered PFIC annual information statements, this is news to me!
A QEF election is almost as good as having a non-PFIC investment. I say "almost" because the ordinary earnings you report from the QEF statement is treated as an ordinary dividend instead of a Qualified dividend. This is true even if the PFIC held US stocks. For many index products, like Vanguard ETFs, the distributions you receive are from dividends only.
You do not have to report unrealized gains and treat them as ordinary income. You would only have to do this if you chose the "mark-to-market" election instead of the QEF election.
The accounting you need to do with a QEF election is tricky. You have to keep track of your US dollar cost basis in the investment. This amount is increased for any QEF income you report, and reduced for any actual distributions you receive, because you don't have to report the actual distribution. I suspect many overlook this, and it doesn't make a big difference if the QEF income is similar to the actual distribution.
The currency conversion can be managed easily. I suggest you do a google search on "Norbert's Gambit". I use CIBC investor's edge and they charge me anywhere between 0.1 - 1% for buying a US ETF with Canadian dollars.
Withholding taxes: you submit a W9 with your brokerage, and you're right, no US withholding tax. Any tax you pay to the US on your US return will be eligible for foreign tax credit on your Canadian return. These should never be above 15% unless you are a very high income individual in the 20% qualified Div bracket. Even then, you could be below 15% effective rate because of averaging.
Canada has a very reasonable rule for foreign investment funds "Offshore investment fund rules or OIF". US ETFs are exempt because they don't offer any tax advantage such as deferral of internally realized gains or dividends. You can google this, and I think you'll quickly agree that the OIF rules don't apply.
I hope this helps. PFICs are complicated!
I'll do my best to answer your questions. I didn't know Vanguard Canada offered PFIC annual information statements, this is news to me!
A QEF election is almost as good as having a non-PFIC investment. I say "almost" because the ordinary earnings you report from the QEF statement is treated as an ordinary dividend instead of a Qualified dividend. This is true even if the PFIC held US stocks. For many index products, like Vanguard ETFs, the distributions you receive are from dividends only.
You do not have to report unrealized gains and treat them as ordinary income. You would only have to do this if you chose the "mark-to-market" election instead of the QEF election.
The accounting you need to do with a QEF election is tricky. You have to keep track of your US dollar cost basis in the investment. This amount is increased for any QEF income you report, and reduced for any actual distributions you receive, because you don't have to report the actual distribution. I suspect many overlook this, and it doesn't make a big difference if the QEF income is similar to the actual distribution.
The currency conversion can be managed easily. I suggest you do a google search on "Norbert's Gambit". I use CIBC investor's edge and they charge me anywhere between 0.1 - 1% for buying a US ETF with Canadian dollars.
Withholding taxes: you submit a W9 with your brokerage, and you're right, no US withholding tax. Any tax you pay to the US on your US return will be eligible for foreign tax credit on your Canadian return. These should never be above 15% unless you are a very high income individual in the 20% qualified Div bracket. Even then, you could be below 15% effective rate because of averaging.
Canada has a very reasonable rule for foreign investment funds "Offshore investment fund rules or OIF". US ETFs are exempt because they don't offer any tax advantage such as deferral of internally realized gains or dividends. You can google this, and I think you'll quickly agree that the OIF rules don't apply.
I hope this helps. PFICs are complicated!
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MGeorge is neither an accounting nor taxation professional.
MGeorge is neither an accounting nor taxation professional.
Comment one: There is a difference between vanguard acknowledging that they are a PFIC, and vanguard producing the documentation that allows you to do QEF. As MG brings out, almost all Cdn Mutual funds and ETFs are PFICs, very few produce PFIC annual statements.
Comment two: MG said " Any tax you pay to the US on your US return will be eligible for foreign tax credit on your Canadian return." I presume you are talking only of DIVIDEND income and taxation of this US ETF.
Any income arising from cap gains will not be credited on your Cdn return,. but would need to be re-sourced on a 1116 with credit given in US.
Comment two: MG said " Any tax you pay to the US on your US return will be eligible for foreign tax credit on your Canadian return." I presume you are talking only of DIVIDEND income and taxation of this US ETF.
Any income arising from cap gains will not be credited on your Cdn return,. but would need to be re-sourced on a 1116 with credit given in US.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Hi nelsona, speer,
This post prompted me to look at Vanguard Canada ETFs and Ishares Canada ETFs. Most of the vanguard ETFs provide PFIC annual information statements and all of the Ishares ETFs provide PFIC annual information statements.
That's it - anyone who indexes their portfolios can do the QEF election and invest in Canadian dollars. I suppose there will be some questions about QEF calculations coming our way....
Cheers!
This post prompted me to look at Vanguard Canada ETFs and Ishares Canada ETFs. Most of the vanguard ETFs provide PFIC annual information statements and all of the Ishares ETFs provide PFIC annual information statements.
That's it - anyone who indexes their portfolios can do the QEF election and invest in Canadian dollars. I suppose there will be some questions about QEF calculations coming our way....
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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speer
MGeorge, thanks again for the input.
When you say "keep track of your US dollar cost basis in the investment" is this just converting my gross investment in the ETF to US dollars based on the annual mean conversion rate from CAD to USD? Would QEF income be unrealized gains in my investment and any dividends reinvested in to my ETF? With distributions being dividends I take as normal income paid to me a reduction of my total QEF US dollar cost basis? If you can help clear me up on this a bit Id appreciate it, getting a bit confused myself.
I see firsthand how complicated PFIC is, but is making a QEF election each year something I could reasonably do myself? Do you make your own QEF's as well? If I remember correct, I read somewhere that the IRS estimates filling for PFIC can take ~21 hours to complete...
If anyone could answer this as well...
If im a Canadian resident with a Canadian-domiciled ETF and sell it and incur capital gains for both countries, could US capital gains tax be used to offset Canadian capital gains taxed owed?
Would the same situation be any different if the ETF was a US-domiciled instead of Canadian-domiciled?
Would dividends paid from a Canadian-domiciled and US-domiciled ETF mirroring the US economy both be taxed at my marginal rate in Canada?
When you say "keep track of your US dollar cost basis in the investment" is this just converting my gross investment in the ETF to US dollars based on the annual mean conversion rate from CAD to USD? Would QEF income be unrealized gains in my investment and any dividends reinvested in to my ETF? With distributions being dividends I take as normal income paid to me a reduction of my total QEF US dollar cost basis? If you can help clear me up on this a bit Id appreciate it, getting a bit confused myself.
I see firsthand how complicated PFIC is, but is making a QEF election each year something I could reasonably do myself? Do you make your own QEF's as well? If I remember correct, I read somewhere that the IRS estimates filling for PFIC can take ~21 hours to complete...
If anyone could answer this as well...
If im a Canadian resident with a Canadian-domiciled ETF and sell it and incur capital gains for both countries, could US capital gains tax be used to offset Canadian capital gains taxed owed?
Would the same situation be any different if the ETF was a US-domiciled instead of Canadian-domiciled?
Would dividends paid from a Canadian-domiciled and US-domiciled ETF mirroring the US economy both be taxed at my marginal rate in Canada?
CDn ETF: you would claim credit on your US return through passive 1116. They are CDn sourced.
US ETF: As I said earlier, any US tax on cap gains would NOT be credited in Canada, by treaty. It would be credited only in US on a "re-sourced" 1116.
For US citizens in Canada, about the only US tax you get to claim as an FTC on your Cdn return is US tax on US dividends, US wages, and US real estate.
US ETF: As I said earlier, any US tax on cap gains would NOT be credited in Canada, by treaty. It would be credited only in US on a "re-sourced" 1116.
For US citizens in Canada, about the only US tax you get to claim as an FTC on your Cdn return is US tax on US dividends, US wages, and US real estate.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Hi speer,
You are correct about keeping track of your investment in the fund by converting CAD to USD for each purchase. QEF income is the amount you have to claim on your tax return. This is the amount that the US tax rules say that the fund should have distributed to you (but maybe it didn't because of different rules, gains defined in CAD, short term vs long term, etc). QEF income is sometimes called "phantom income".
Example 1:
Let's say $1 CAD =$ 0.75 USD
You invest $1,000 CAD in XIC (which now has PFIC info statements :) )
On Dec 21, it distributes $25 CAD you keep the cash.
The QEF statement says:
Ordinary income = $27 USD (note this is more than you got)
Net capital gain = $10 USD
On your US tax return, you claim:
$19 as other (PFIC income)
$10 as capital gain on Sch D
Your cost basis in the fund is:
Contributions + QEF inclusions - dividends received. ($25CAD = $19USD)
So $1000 CAD = $750USD + $37 - $19 = $768.
And you'd use this cost when you sell. A QEF election means you report only the gain you realized from selling on your Schedule D.
Example 2:
You invest $1000 CAD in XSP.
It distributes $50 CAD to you as Canadian capital gain distributions.
The QEF statements says $0 ordinary income, $0 capital gains.
(this is possible is USD gains are in USD).
You report $0 in income on your US tax return - note you don't have to report the $50CAD dividend - this is the rules of section 1293
Your cost in the investment is $750 USD - $38USD = $712.
See how this works - you didn't have to report the income, but under US rules, they didn't have to give you a distribution. But you'll pay a higher capital gain when you sell it later.
I hope this helps.
nelsona:
About selling a US ETF for a US citizen living in Canada.
Isn't the sale of any stock, US or Canadian considered to be of Canadian source even without the treaty? The US source rules say that the sale of personal property (including stocks, funds, etc) is based on the residence of the taxpayer, so no resourcing necessary.
You are correct about keeping track of your investment in the fund by converting CAD to USD for each purchase. QEF income is the amount you have to claim on your tax return. This is the amount that the US tax rules say that the fund should have distributed to you (but maybe it didn't because of different rules, gains defined in CAD, short term vs long term, etc). QEF income is sometimes called "phantom income".
Example 1:
Let's say $1 CAD =$ 0.75 USD
You invest $1,000 CAD in XIC (which now has PFIC info statements :) )
On Dec 21, it distributes $25 CAD you keep the cash.
The QEF statement says:
Ordinary income = $27 USD (note this is more than you got)
Net capital gain = $10 USD
On your US tax return, you claim:
$19 as other (PFIC income)
$10 as capital gain on Sch D
Your cost basis in the fund is:
Contributions + QEF inclusions - dividends received. ($25CAD = $19USD)
So $1000 CAD = $750USD + $37 - $19 = $768.
And you'd use this cost when you sell. A QEF election means you report only the gain you realized from selling on your Schedule D.
Example 2:
You invest $1000 CAD in XSP.
It distributes $50 CAD to you as Canadian capital gain distributions.
The QEF statements says $0 ordinary income, $0 capital gains.
(this is possible is USD gains are in USD).
You report $0 in income on your US tax return - note you don't have to report the $50CAD dividend - this is the rules of section 1293
Your cost in the investment is $750 USD - $38USD = $712.
See how this works - you didn't have to report the income, but under US rules, they didn't have to give you a distribution. But you'll pay a higher capital gain when you sell it later.
I hope this helps.
nelsona:
About selling a US ETF for a US citizen living in Canada.
Isn't the sale of any stock, US or Canadian considered to be of Canadian source even without the treaty? The US source rules say that the sale of personal property (including stocks, funds, etc) is based on the residence of the taxpayer, so no resourcing necessary.
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MGeorge is neither an accounting nor taxation professional.
MGeorge is neither an accounting nor taxation professional.
Generally, as you say, sourcing of gains is by tax home, but for US citizens living in abroad, this is only if the taxpayer is paying at least 10% tax on those gains to the foreign country. That is probably a safe bet in Canada where effective rate is almost always greater than 20%, but there may be years when it is not. That is why the treaty overrides this, and would re-source it to Canada.
For non-resident, non-citizens, the gains sourcing is ALWAYS by residency.
For non-resident, non-citizens, the gains sourcing is ALWAYS by residency.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing