Somehow I missed this which is shocking because I don’t normally miss anything. I will also add this letter was CCed to our friend Kevin Shoom at the Department of Finance in Ottawa.
The U.S. through the introduction of the Foreign Account Tax Compliance Act (FATCA) and other means is targeting activities in tax havens – Canada, with its long history of collaboration and effective tax-treaty agreements with the U.S., is clearly not in that category.
In this context we believe the application of PFIC rules, now and in the future, to Canadian mutual funds has a significant adverse impact on American mutual fund investors who are living in Canada. These include: payment of a higher than required level of tax; potential levying of punitive tax charges; and significant compliance costs due to the complexity of the regime. As a result mutual funds may be avoided as an investment and individual securities chosen instead as the PFIC rules do not apply.
Under U.S. PFIC rules, dispositions of Canadian mutual funds along with certain distributions from these funds are taxed at the rates that apply to earned income (as opposed to the preferential tax rates that apply to capital gains). Depending on the timing of the distributions and/or dispositions, punitive interest charges may also be imposed.
The complexity of the PFIC regime leads to significant compliance costs both for the American investor resident in Canada and the Canadian mutual fund company. Our concern is that when faced with the prospect of the punitive tax treatment and/or the additional tax return preparation costs, American investors will choose to divest themselves of their Canadian mutual funds rather than deal with the alternative.
The IRS estimates that 5 to 7 million American citizens reside abroad. Of that total, approximately 1 million American citizens are estimated to reside in Canada. The implementation of FATCA beginning in 2014 will likely increase the number of Americans residing in Canada who will file US tax returns each year. Although the intent of FATCA is to catch Americans evading U.S. tax by investing offshore, these rules cast a wide net, and will include compliant Canadian taxpayers who are Americans by birth and have lived and worked the majority of their lives in Canada.
As financial services companies in Canada will comply with FATCA, there will be a much greater awareness of who is a U.S. tax filer and how the U.S. tax filings are complicated by the PFIC rules for mutual funds – an issue not well understood to date.
I know that I’ll never have the wisdom and depth of understanding that some of the sages in this battle have, and I am eternally grateful to those many who share their knowledge and expertise here. I am, however, more than willing and able to be a foot soldier, as I’ve stood up and taken my bullet already and there’s really not much more harm they can do to me without making them look worse than they already do.
Point taken. Again … if you avoid investing in non-US markets as a “US Person”, you can avoid such expensive “mistakes” in the future.
The following piece on SwissInfo says it rightly: ” lots of tax lawyer vultures are trying to make easy pickings…” — I believe this also applies to matters related to PFIC filing. The true winners are these vultures.
IMHO, invest in US markets moving forward and avoid not only PFICs, but also unnecessary FBAR line times and any additional FATCA reporting. Sounds silly, but the US markets offer more than enough investment opportunities (outside mutual funds), and through the purchase of ADRs and country-specific ETFs you can even hedge against a potentially declining USD. This is nicely explained by Thun Financial:
Frankly I think you should avoid lawyers for any reason. As you can see from this thread, one of the things that really bothers me, is that not a single one of them every explains the situation with the PFICs (no regs, etc). It’s as though they think their job is to do the bidding of the IRS. The more experiences of people that I vicariously absorb, the more I am coming to the view that the lawyers are as big a problem as the IRS (and in many cases bigger).
Second, yeah, I have seen the Thun Financial stuff. The US Congress aided by the IRS and our friends the lawyers have actually created a new industry:
“Financial Planning for U.S. Citizens Abroad”
Thing is though that this is really aimed at people who intend to return to the U.S. The situation many U.S. citizens abroad has reached the point where they hate the U.S. so much they will never return. Psychologically they won’t want their money in the U.S. This is true even though as “Thun Financial” points out, the US markets are more efficient and less expensive. True, but people do NOT trust the U.S.
There is only one viable long run strategy – renounce! Or if you want, return to the Homeland.
@TheDude, you are forgetting local tax issues. A US citizen living in the UK can run into UK tax problems if they own US-domiciled funds or ETFs. Most would be “offshore” from the UK perspective, leading to unfavourable tax treatment in the UK. It’s a little like the PFIC issue but in reverse (and not nearly as bad).
I’m #1 on that psychological point — we have pulled all US investments; everyone I know knows from me this horror story of US-based taxation and FATCA and entrapment of my son into US citizenship; have renounced US citizenship and don’t ever need to again cross the border unless it is for a relative’s sickness or deathbed. Vacations will be elsewhere. My small protest that may not mean a thing in the big picture.
Maybe investing in garden tools and renting a small patch is a better choice? Growing fruit and veggies for your own consumption is outside any tax jurisdiction. Preserve the “fruits of your labour” in bottles (jams, pickles…) along with long-lasting nuts and you’ve got retirement taken care of as well!
PFIC is what you could call “reverse protectionism”. Ensures nobody exits your domestic market – rather than prevent outsiders entering.
@USCitizenAbroad, @Kalc, @Bubblebustin
“What would you expect a U.S. person with many years of fillings in the system to do?”
That is exactly the issue. This whole PFIC thing makes me SO ANGRY and FRUSTRATED!
I don’t see ANY good answer for such persons. No matter what option you look at it spells
financial disaster, especially for people who are at or near retirement age. They cannot afford
to lose all of the money they have invested over many years just to now become “compliant” (i.e.pay big bucks to have some accountant fill dozens of 8621s, pay back taxes, interest, and penalties and more taxes and interest after they sell the PFICs) and they do not have any other regular source of revenue to replace such a loss.
“If you are a Canadian citizen without US assets, you are protected. Don’t tell your FI if you happen to have been born in the US. Don’t have more than 1 million in one account.”
It’s not so simple. If you’ve had a long term relationship with your financial advisor, he likely may already know that you are a USC. Many mutual fund portfolios contain a mixture of US and non- US assets, so you likely may have some in your portfolio already. What should you do? Sell them and then what?
How do you deal with them on the following year’s tax return? FATCA kicks in way below having 1 million in one account.
“I do NOT believe that the Government of Canada understands this problem in its entirety. Would you be willing to collect these comments (including the one about the interaction between PFICs and SubPart F),”
I agree totally. If the government of Canada DID understand all the implications and what a horrendous
financial burden this will create for U S persons in Canada, when their financial institutions turn over the data about their TFSAs, RESPs, PFICs, and other investments via FATCA, I think they would not be so ready to sign an IGA. Those persons will be financial bankrupted if the IRS gets their data and goes
after them. And when these people are left bankrupted, it will be the Canadian government that will have
to help support them because we all know that the US government won’t do anything for USCs abroad.
So, please, please do everything that you can to inform them (Kevin Schoom and others) of what are all the implications if they go down the FATCA compliance path. I think this PFIC problem has certainly not been given enough visibility with our government. It is incredulous to me that the IRS could make a policy change in 2010 about Canadian mutual funds without a formal regulation and then apply it retroactively. This is just WRONG and the Canadian govenment needs to stand up for us and fight this.
Sorry for the rant, but this issue makes me crazy. Reading what USCitizenAbroad suggested as the only solution for the most financially responsible citizens today just makes me feel more depressed about an already depressing situation. Yes, it does help to be able to talk about it here with others but the reality that is looming in the near future if FATCA kicks in as planned is just too awful.
Here are the solutions:
Solutions From The Government of Canada
Any IGA would exempt from its application lawful residents of Canada regardless of their citizenship. Put it another way, the U.S. can’t both have FATCA and citizenship-based taxation. Is this possible? Not unless this issue is really understood which is not.
Solutions From U.S. Persons Abroad – Take Charge Yourself
You and I agree that the ones with the biggest problems are the ones who are entrenched in the system. Their options are:
1. Do not sell their PFICs. The problems kick in when they are sold. Continue to treat the distributions the way you have always treated them on your tax return. Repeat: It’s the sale that triggers the very worst of the problems.
2. The time has come to recognize that you will never be able to be U.S. tax compliant. Just not possible unless you pay the staggering costs of compliance and all the fines associated with trying to plan for retirement. I would stay away from the lawyers who will scare you to death. Just keep living your life. Don’t do anything that will trigger taxable events. The advice that most accountants and lawyers give is: sell your PFICs. For those who have had them for the long term, that is the worst possible advice. You do NOT sell them. You hold them and simply pay tax on the distributions the way you always have. That’s the best case scenario. Include the income on your taxes.
3. RRSPs – This may be the exception to my suggestion for holding the PFICs. Assuming that because they are in an RRSP that the sale inside the RRSP is NOT a taxable event, then perhaps you get rid of those (but get competent advice for taking that step).
4. Don’t listen to the F_____ cross border professionals. Most of them have really not thought this through plus they have trouble separating their interest from your interest.
5. If all else fails, hide behind the treaty.
6. Become a Canadian citizen if you are not already. Then start lobbying the Cdn government to pass law saying that all naturalized Canadian citizens were Canadian citizens from birth. This will protect their own tax base and their citizens from the U.S. exit tax.
7. Just accept that the US considers you to be a criminal. Hell, people live like that all the time. Of course, you should stay out of the U.S. You might even learn to like it. Dress the part. Pick up the language. Learn to talk that way. It might be fun for you. You might get the respect that you think you are lacking. Pick a criminal to model yourself on – say Barack Obama.
8. If none of these work, and you have Supart F income, then, well you know my suggestion.
Curious what you think of those suggestions?
For those entrenched in the system, surely renouncing is still a better option than continuing to have to deal with this BS year after year. At least that frees you from the ongoing obligation. Yes, I accept that it may leave issues from the past and may not be a great idea for those that have a need or desire to set foot in the US in the future.
Yes, there is still an issue with the 8854 compliance, but there is still a choice on how to play that game, depending on the circumstances and risk tolerance.
Thanks for your comments on my posting. Here are my thoughts on your suggestions. I’ve included a
few questions I have on some points you raised.
Solutions from the Government of Canada
Yes, I agree that this would be a great solution, but I don’t believe they do understand it.
Solutions From U.S. Persons Abroad – Take Charge Yourself
1. Yes, I agree that it makes no sense to sell the PFICs as that will trigger a nightmare.
2. Yes, the lawyers and accountants that I’ve talked to have all said to sell ALL the PFICs, but of course they don’t have to worry about paying the costs associated with doing so. I concur that there is thus NO
way to ever be tax compliant in this scenario, unless of course the tax code changes.
“You hold them and simply pay tax on the distributions the way you always have. That’s the best case scenario. Include the income on your taxes.”
QUESTION: So I infer from your suggestion that one should not bother with now filing 8621’s and the
complicated calculation of “income” derived from them, but just continue to include the actual interest or
dividends or capital gains distributions you receive from the mutual funds on your tax return. Is that what you are suggesting? As soon as you look at filing 8621s for each mutual fund you are talking BIG bucks
to have an accountant prepare it and these forms are way too complex for the average taxpayer to attempt.
QUESTION: What happens when FATCA kicks in and the FFI or CRA turns over the details of these funds to the IRS? Won’t they then identify them as PFICs and come screaming for all they back taxes, 8621 forms, etc? Is that where your suggestion 5 comes in?
3. Don’t know about the RRSPs. This would require more research. For now these are not as
important since the tax is deferred by 8891.
5. “If all else fails, hide behind the treaty” Not sure just how one can hide behind the treaty. Can you
clarify what you mean here?
6. Definitely a Canadian citizen. Ideas how we can get the Canadian government to pass such a law?
7. Yes, definitely safer to stay out of the US. Not really a big hardship on that point for many of us.
8. I didn’t really understand the Subpart F business completely but sure hope it doesn’t apply. I’d hate to think that that would be the only solution.
I’d be interested in your further comments and answers to my questions above. Your comments are always very informative. I appreciate having the means to exchange thoughts with people like you who do understand this complex and horrendous issue.
KalC – Bob’s your uncle?
How about: Sam’s your carbuncle.
@USCitizenAbroad, not all lawyers or tax professionals are bad. I hired a lawyer to protect me while investing in the US, and he did a great job. In Switzerland, I asked a CPA if he could help me to do my taxes and he kindly advised me not to hire his services since he said that it would cost me too much for what I needed. Thus, I’ll definitely hire his services if the need for such ever arises. Yet, as for the forum tax “experts” who give free tax “advice” while recommending that one pays for their services and insulting anyone who disagrees with their opinions, I’ll pass.:)
You are asking for certainty where none is possible. Within the context of an uncertain situation YOU need to take a very objective look at your complete situation.
You must understand that no person including a tax professional can ever tell you to NOT be compliant with the law. No person can tell you to NOT file a form 8621 – you will never find that. A failure to file a form that you were required by law to file subjects you to the provisions of “Form Crime”.
Tax professionals love forms. I once saw one file a 3520 when there was no way something could have been a foreign trust. You need to look at your investments and you must decide what forms are required. This of course implies the proper characterization of your investments. Try to understand how U.S. tax law defines various things. Remember that you must decide based on U.S. law. For example, something could be a “trust” for the purposes of Canadian law but be a “corporation” for the purposes of U.S. law. That by the way is the basis of the 2010 IRS ruling that is used to justify the U.S. treatment of certain Canadian trusts as corporations under U.S. tax law.
SubPart F is a massive injustice that kicks in if you are the owner of a “Foreign Corporation”. The IRS makes you include certain kinds of company income in your income for tax purposes. Therefore, no U.S. citizen abroad should have one. This is a problem because it is a common way to carry on business in Canada.
Why don’t you just renounce your U.S. citizenship?
Anyway, your comment has inspired me to write a post about this problem.
You are right. On a personal level I know some good ones. But here is the problem:
Tax compliance counseling is no longer just about tax, it has now become life counseling. Anybody can crunch the numbers. The problem is in making “life altering decisions”.
Pingback: The Isaac Brock Society
Pingback: #IRS abuse of Americans Abroad – The greater the effort! The greater the punishment! | U.S. Persons Abroad - Members of a Unique Tax, Form and Penalty Club
“Why don’t you just renounce your U.S. citizenship?”
I have thought about doing so, but what about the issue of 8854 compliance?
As stated in your earlier comments, there is no way to be tax
compliant in this situation (without committing absolute financial suicide).
@ St George Said: “Yes, there is still an issue with the 8854 compliance, but there is still a choice on how to play that game, depending on the circumstances and risk tolerance.”
Exactly the issue. I’m not really sure what the choice is on how to play that game?
I have read extensively here on IBS and also on Phil Hogden’s blog on this issue of tax compliance
and renunciation and it seems to me like renouncing now would be like putting my head on a
block and saying to the IRS, go ahead and chop it off. I have no idea what they could or would
do to me in the future. And would this be any worse than the current situation?
Thanks for making a separate post to highlight this issue. It is difficult for people who are not in
such a situation to appreciate how truly awful this is for someone who has always tried to do the
right things (i.e. saving for retirement with legitimate local means and filing US taxes to the best of their
ability) and now feels totally betrayed and desperate.
It’s precisely my desire to do the right thing that’s cost me dearly. Had I waited for a better deal (in the meantime becoming what the IRS considers a wilful tax evader) I would have been far better off in Streamlined than in OVDI. Who knows, perhaps if all those wilful tax evaders were to wait even longer, RBT may arrive to save the day!
On the bright side, the number of years of retirement savings I’ve had to give up are more than offset by the number of years this ordeal has shortened my life! I’m probably in the end better off!
Why should we support “the US Economy”. The US is not where we live. On top of that, the US economy is in the toilet from consistent misspending. Why should we throw good money after bad? I’m just waiting for the US economy to implode. I’d suggest we all dig a 50 foot bunker…and wait for the missiles to fly.
Don’t you find it odd that Canadian banks seem to have spent more effort on opposing the Volcker Rule than on opposing FATCA?
See: ‘What the Volcker Rule means for Canada’s biggest banks’
Barbara Shecter | December 10, 2013
“………Intense lobbying by senior Canadian officials including federal finance minister Jim Flaherty and former Bank of Canada governor Mark Carney has successfully blunted far-reaching implications for the country’s largest banks from the biggest overhaul of financial regulation in the United States since the Great Depression.
But the final version of the Volcker Rule, a key plank in the U.S. reform that aims to rein in the type of speculative trading by banks that led to the financial crisis, will nonetheless require Canada’s biggest banks to add a layer of costly and time-consuming compliance systems simply because they have operations in the U.S.”……..
and this involves snowbirds and mutual funds too;
“……….An example of the minutiae involved can be found in the case of mutual funds bought or sold by so-called Snowbirds, Canadians who spend significant time in the United States. The Volcker regulations will permit some of these trades, but only if the trades are initiated by the bank’s customer, something it will be up to the bank to prove.
Canadian bankers complained last year that mutual funds had become ensnared in the Volcker regulations simply because of a crackdown that was intended to curb banking relationships with hedge funds and private equity funds.
Beyond the financial industry, the initial draft of the regulations drew sharp rebukes from Canada’s top banking regulator, the federal government and the Bank of Canada.”…………..