Liberty and justice for all United States persons abroad

The Isaac Brock Society

Posted on by Posted in Issues regarding US persons abroad 14 Comments

A Canadian received a message from his financial adviser that included:

Mutual Funds, U.S. Taxes, and Your Clients

PFIC

With the new rules coming into place, we are the only firm I know of that is providing the ability to file a QEF election for the 2013 tax year. Therefore if you have any clients with us that are US persons and file US taxes, we have the ability to provide Annual Information Forms for all their holdings that they can use in conjunction with Form 8621 to file a QEF election with the IRS.

We can provide Annual Information Statements for all of our funds. In providing these statements, we simply need to know which of your client’s need them; since we have no way of knowing whether your clients are “US persons”. Once we know which of your clients’ need the Annual Information Form, we will prepare and send them to you.
The bottom line is:

Fidelity Canada appears to be the second Canadian mutual fund company to market their Canadian mutual funds in such a way that investors can avoid the default S.1291 confiscation taxation scheme. Fidelity is providing the “paperwork” which allows fund investors to take either the “QEF” election or “mark-to-market” election (which are the least punitive of the three PFIC elections).

As you know a “critical mass” of opinion takes the position that Canadian mutual funds are PFICs. A mutual fund, deemed to be a PFIC, can be taxed in three different ways. Those who are interested are invited to read our submission – PFICs and the taxation of Americans Abroad – to the Senate Finance Committee. Leaving aside the technicalities, this “co-operation” by Fidelity makes it possible for investors to get most of the benefits of investing in Canadian mutual funds (although they will in some cases have to pay tax on money they have not received). It’s important to note that this does NOT give Canadians with “U.S. taint” the same benefits as other Canadian residents (they will still have to pay tax on distributions they do not actually receive). But, it will allow them to avoid the confiscatory effects of the S. 1291 rules.

These actions by MacKenzie and Fidelity will force the other fund companies to follow.

Highlights from the Fidelity announcement include:

Fidelity is helping investors comply with U.S. PFIC tax rules

Fidelity knows there is concern among investors about the U.S.Passive Foreign Investment Company (PFIC) rules and is taking a leadership position in the industry by making this option available to Canadian investors who are classified as “U.S. persons” under U.S. tax law. These rules could significantly affect “U.S. Persons” who hold Canadian mutual funds, so we are working hard to provide you with all the available information about these complex rules.

We believe it is important for those who may be affected by these rules to have the knowledge necessary to make informed decisions. However, we also believe that investors affected by these rules should not make changes to their Canadian holdings without first speaking with their advisers and a U.S. tax specialist.

Fidelity will provide PFIC Annual Information Statements for all of our mutual funds for the 2013 tax year. We expect to be able to provide PFIC Annual Information Statements for those funds prior to the April 2014 U.S. tax reporting deadline for individuals.
This appears to be a response (at least in part) to the new FATCA reporting requirements on individuals which require that mutual funds be reported to the IRS.

Conclusion: By serving the IRS, the Canadian mutual fund companies are serving their customers.

Cross-posted from citizenshipsolutions.ca

14 thoughts on “Fidelity joins MacKenzie to make ownership of #PFIC mutual funds more tolerable for Canadians”

  1. People, stop playing with the enemy. Exit the banks and anything they want you to do. The banks have been full of wrong advice for as long as I can remember. I’ve done very well by doing the opposite of what they suggest. Mutual Funds LOLOL How exciting!

    Gold update up 9.77 CAD to 1477.78

  2. ….”they will still have to pay tax on distributions they do not actually receive..” I married an accidental American and we have several mutual funds outside our RRSPs. Will we have to pay tax? Who is going to enforce this? Or is this another instance where Canada is not going to collect on behalf of the IRS? Or is the mutual fund company going to try to grab some of my CANADIAN hard earned cash ?

  3. Interesting development. So Fidelity Management & Research (the North American Fidelity) and Fidelity International (everything but North America) have chosen two diametrically opposed paths. They’re separate firms but both largely owned by the Johnson Family of Boston. FMR has chosen to help those with US taint comply while Fidelity International will not accept customers with a US connection. How positively bizarre.

    Having read the announcement, I’m assuming that they will publish what the long-term and short-term capital gains “distributions” would have been on a per share basis had the fund been a US mutual fund. But it’s unclear to me what this means in the context of Form 8621 and ultimately 1040. Does this also mean that you get capital gains treatment (ie beneficial rates) for said “income”? Would this also mean that you could claim foreign tax credit in Canada for the US taxes that you paid (as opposed to PFICs being treated as a separate class of income by the US and taxed fully in both countries) assuming they didn’t expire in Canada before you sold your holdings? What about if you sell, are your capital gains in a QEF holding treated as capital gains by the US?

    Although you’re still paying US tax today on “gains” you might not realise for decades it certainly sounds better than MTM (where you pay US tax on the movement in the value of the entire holding including unrealised fund gains and USD depreciation and not just the “gains” realised by the fund) or excess distributions which is just evil. It might make holding an index fund with a fund provider who published QEF data almost palatable for a “US person”.

  4. “I married an accidental American and we have several mutual funds outside our RRSPs.”

    Move them all under your name. Keep his accounts under $50,000. Rest easy.

  5. I’ve already decided that any investments we make going forward are all going to be under my name only. My husband is going to be the “broke accidental American” soon. I’m going to enjoy being his Sugar Mommy.

  6. They didn’t mention that in order to take advantage of this so called “service” you must first “out” yourself as a US person to your financial advisor. It might be better to just remain a Canadian.

  7. @omgheesstillanamerican

    Lol…. thank u for that… made me spit up my coffee in laughter when I read your comment…

  8. @Edelweiss
    The Fidelity FMR strategy is not perhaps that surprising, given that it is known that the Swiss branches of U.S. institutions had a long-standing policy of not taking on U.S. clients in Switzerland because they did not want to cannibalize their U.S. businesses.
    @Joe Smith @omgheesstillanamerican
    The strategy of having all investments in the non-U.S. spouses name going forward is definitely a sound one from a tax perspective.
    It should be mentioned if a PFIC is transferred to a non-U.S. spouse, U.S. taxes will need to be paid on this transfer (because transfers of investments to non-U.S. spouses are seen as a way of getting out of capital gains tax rather than a method of remaining sane despite insane tax regulations) and you might want to research what the taxes on such a transfer are, just in case it is more advantageous to sell, transfer the cash to the spouse and have them repurchase the fund. I am not sure, for example, whether the high gift tax on appeciable assets would apply here in addition to the PFIC taxes. Does anyone know?

  9. @Publius, some tax preparers believe it’s legal to transfer up to the annual gift allowance between a US and NRA spouse (about $140,000 vs $14,000 per year to non-spouse. ) Get the impression though that this might be an aggressive position.

  11. How the Chinese Buy Gold and Why
    http://www.zerohedge.com/news/2014-02-22/how-chinese-buy-gold
    and this beauty
    Things That Make You Go Hmmm… Like “Anti-Gold Idiots”
    http://www.zerohedge.com/news/2014-02-20/things-make-you-go-hmmm-anti-gold-idiots

    File these under protecting your assets in case of possible financial and political dislocation and physical enemy attacks. The Chinese are hoarding gold and that’s why it is going up in value everyday it seems

  12. Has anyone considered the possibility that the PFIC and CFC laws might be a violation of some free trade agreements? Article 1404, Paragraph 1 of NAFTA states:

    “No Party may adopt any measure restricting any type of cross-border trade in financial services by cross-border financial service providers of another Party that the Party permits on the date of entry into force of this Agreement, except to the extent set out in Section B of the Party’s Schedule to Annex VII.”

    Now, this legalese confounds me at the best of times, but I understand it to mean that the USA may not adopt any measures to restrict the abilities of Canadian or Mexican fund managers to accept US investors. The date of entry of NAFTA was 1994; I believe PFIC rules were enacted in 1986. Annex VII, Section B appears to impose wide restrictions on Canadian firms, not so on Mexican ones.

    While most treaties don’t consider differing tax treatment of the states’ nationals to be discriminatory, this is different, because it treats US persons investing in Canada differently from US persons investing in the USA. Also, the taxation of PFICs is so punitive, that it could be argued that it transcends fair taxation. Of course this could be argued in the US courts, but NAFTA likely provides dispute resolution procedures wherein the USA would be bound by the decision of an arbitrator. Even if the additional taxation of PFICs could be justified, perhaps the onerous information filing requirements would stand up. Last time I checked the PFIC form, the IRS was estimating the time needed for compliance at around 40 hours; and that is for each fund!

    This is not an isolated issue applying to a few Canadians (whom the US considers US persons) with mutual funds. There are a number of widely subscribed closed end funds for sale in the US which are Canadian. The Central fund of Canada and The Central Gold Trust are Canadian funds with around $4.5 billion in assets (collectively) which are popular investments in the USA. Their status as PFICs may be debated, but there are many Canadian companies (not just funds) for sale on US exchanges whose capital structure causes them to be considered PFICs. A few of these diligently file an ‘annual information statement’ allowing their US investors to comply with the QEF election requirements. Just Google “QEF Annual Information Statement” to see a few of them.

    I doubt there are many homelanders who are even aware of QEF elections and are therefore not in compliance with IRS regulations. The numbers of homelanders that unwittingly own PFICs could be quite large. If IRS enforcement of these provisions against foreign Americans is disproportionate when compared to homelanders, this could be cause for a complaint. Few homelanders would continue to hold such investments if each such fund took 40 hours and $$$ in tax compliance. If that doesn’t prove to be a violation of NAFTA, then NAFTA has no teeth.

  13. Silver Lake (a US based VC firm with offices in Silicon Valley) avoided US2$Billion in federal taxes on sale of Skype to Microsoft and parks $8.5 Billion offshore in the Cayman Island using PFICs/Cayman holding companies and Cayman private equity companies.

    Here’s the “scoop” and details from MarketWatch. http://www.marketwatch.com/story/skype-deal-a-lesson-in-offshore-accounting-2011-05-12?link=MW_story_popular

    http://seekingalpha.com/article/3962071-gilead-gilead-art-thou-gilead?v=1459562301&commenter=1

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