Which type of Canadian investments would not be PFIC?

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speer

Which type of Canadian investments would not be PFIC?

Post by speer »

In basic terms PFIC falls under the following:

Canadian-Domiciled

1) ETF's
2) Mutual Funds

To invest CAD funds in Canada without PFIC restrictions I am restricted to individual stocks and bonds only, although it appears even individual stocks be fall under PFIC.

[b]PFIC[/b]

[i]...a non-U.S. corporation that has 75% or more of its gross income consisting of passive income or 50% or more of the average fair market value of its assets consisting of assets that produce passive income.[/i]

I generally have a difficult time actively applying the definition of PFIC, especially with whats considered passive since the term is so ambiguous.

I was seeking to invest in Canadian corporate bonds as well as steady dividend yielding stock such as Canadian utility companies.

1) Are individual stocks and bonds the only PFIC exempt "investments"?
2) Are virtually all Canadian-Domiciled ETF's PFIC? (IRS confirmed Mutual Funds are)
3) Can you give a layman's explanation on what stocks and/or bonds / other investments would be considered PFIC and to be avoided?
4) Would utility stocks fall under the PFIC definition?
speer

Post by speer »

5) What if I bought a bank stock such as Royal Bank of Canada? Wouldn't 75% of its gross income be passive since it generates money through loans?

What about telecom, grocery, utility or insurance companies?

It becomes difficult to distinguish which would be considered PFIC.
speer

Post by speer »

Or REIT's**
Mark T Serbinski CA CPA
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Post by Mark T Serbinski CA CPA »

Generally, a stock of a listed corporation would not be a PFIC.

A bank conducts the active business of borrowing and lending, and is thus not engaged in passive activities.

The definition is intended to classify pooled investment situations, mutual funds and similar investment vehicles as PFIC's.
Mark
MGeorge
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Post by MGeorge »

Hi speer,

To my knowledge Canadian mutual funds, ETF are PFICs.
REIT are very likely PFICs, but I've noticed that Vanguard Canada's REIT ETF "VRE" takes the position that the underlying REITs are not PFICs (VRE is thought).
A holding company is likely not a PFIC, provided that the underlying passive companies are majority owned by the holding company. For example, stock in Canadian Tire holds a REIT inside it, but it is the majority owner, so no PFIC reporting needed.

GICs are not PFICs
Structured notes are not PFICs (good example is high interest savings accounts units held in a brokerage account)
Money market funds are PFICs

The only way to avoid all PFIC reporting is to use only individual stocks, bonds, or stick to US based ETFs.

Cheers.
------------------------------
MGeorge is neither an accounting nor taxation professional.
Fitch
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Joined: Sun Dec 01, 2019 5:10 pm

Re: Which type of Canadian investments would not be PFIC?

Post by Fitch »

PFICs are very confusing as I think Enbridge would be but if banks are not what about stocks Manual Life? So it would be much safer to just hold all U.S. stocks and etfs and there would be no issue as they are not foreign? And the same for a TFSA? Thank you
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