Petros asks how FATCA will impact publicly traded trusts in Canada which have most of its income from US sources.
My friend’s blog, Beating the Index, has recently been promoting the virtues of two high payout energy trusts that the Calgary oil guys have set up to exploit US legacy oil and gas by using horizontal drilling and multi-fracking technologies. The Canadian government ended the income trust structure for most Canadian companies on January 1, 2011, because it provided a tax loophole for foreigners investing in Canada, and corporate profits could escape the country with a mere 15% withholding–in the income trust, the profits flowed through to individual distribution recipient who then declared it on their taxes as unearned income. Apparently, the income trust structure (or something similar) is still available for Eagle Energy Trust (EGL.UN) and Parallel Energy Trust (PLT.UN) because they are exploiting a foreign source of income.
In the past, I’ve merely responded to Beating the Index by saying that I’m out of the US market because of the persecution of US persons, though I thought that EGL.UN, an asset held in Canada, would be a safe because Mich could buy or sell it without IRS implications. But now I am not so sure, because it dawned on me this morning that FATCA doesn’t impact Foreign Financial Institutions (FFIs) only but also foreign trusts. So this morning I asked Mich:
Hey Mich: I was wondering if you have had a chance to determine what the implications of FATCA will be on these Canadian trusts, considered “foreign trusts”. I think that companies like Eagle Energy Trust or Parallel Energy Trust like banks, foreign trusts must determine and declare to the IRS all of their US persons. If they do not become FATCA compliant they will experience a 30% withholding of their US source income. In order to be FATCA compliant such trusts would have to either go off the public market (because ownership changes on daily basis), or brokers would have to keep track of who is the US person (i.e., the trust could only be traded by a FATCA compliant FFI).
I don’t know what the implications of this are. It may result either in the conversion of the trust to a regular corporation or to these trusts going private before 2014. Let me do some homework, but this sort of thing is complicated enought and too few people realize the financial damage that the Obama administration is doing to the world economy. FATCA threatens to dismantle the world economy, or at least, the United States’ participation in it.
I am still of the opinion that the Canadian FFIs will either comply with FATCA, thus violating the Human Rights of their clients who are deemed by the IRS to be US persons (that includes permanent residents who hold Green Cards and US citizens, and dual Canadian and US citizens, and potentially anyone born in the United States); or because of complaints, they will not be able to comply, and as a result, there will be a sudden exodus of Canadian investments from the United States. The worldwide impact of FATCA is estimated to be at least 14 trillion of foreign assets leaving the United States (see http://isaacbrocksociety.com/2011/12/11/fatca-a-ticking-time-bomb-for-the-economy/ ).
I am wondering if anyone knows the answer to this question: How will FATCA impact trusts like Eagle and Parallel?
Would have also thought that these sort of publically traded investment trusts would be considered passive foreign investment companies (pfic’s) which suffer from onerous taxation by the irs (8621’s) as well.
That is probably right, though I don’t know enough about it. But for a Canadian, they are considered straight up unearned income and taxed at a high rate (if outside an RRSP, TFSA, etc.); but if your income is already low, there is no reason not to own them outside an RRSP.
Is this helpful to you:
“The US introduced the law in response to numerous high-profile tax-evasion cases, including several involving secret accounts in Switzerland. But banks began lobbying against it almost as soon as it was passed. Several large banks, including Credit Suisse, Barclays and the Canadian bank TD Bank have spent millions fighting the law. European Union officials have also sought changes to reduce the burden on European banks. To no avail.
“The US interest is to have reporting on accounts to stem the tide of offshore tax evasion,” senior Treasury Department official Manal Corwin told the Financial Times.
And even banks that cease serving US customers may not be entirely safe. “Even if you have no US customers, you are not out of scope,” Mark Naretti, managing director of auditing firm KPMG, told Reuters this week. “This would also require that the firm not have any US investments and not be part of an expanded affiliated group that includes entities that are participating foreign financial institutions.”
In other words, HypoVereinsbank and Deutsche Bank may be on the hook no matter what.”
http://www.spiegel.de/international/business/0,1518,803742,00.html