ARE YOU SUBJECT TO U.S. TAX REPORTING RULES?

forwarded from Jas Salh

If you are classified as a “U.S. person”, you may be subject to certain U.S. tax filing requirements and not even know it.

Does this apply to you?

The definition of a “U.S. person” generally includes

* U.S. citizens

* U.S. residents

* U.S. green card holders

* anyone who has a substantial connection to the U.S.

* certain entities organized in the U.S.

However, since the Internal Revenue Service (IRS)’s definition of a “U.S. person” is very broad, it’s possible there are Canadians who may not realize they have U.S. tax filing obligations.

 

What you need to know

In 2010, the IRS issued a clarification to a set of existing tax rules.  That clarification resulted in Canadian mutual funds being classified as corporations for U.S. tax purposes.  As a result “U.S. persons” who hold Canadian mutual funds are subject to the PFIC * rules.  These rules are complex, and it is suggested you seek U.S. tax advice on how you may be affected.  “U.S. persons” are required to report income from each PFIC held at tax time.

 

* Additional PFIC details

A PFIC is a non-U.S. corporation of which 75% or more of its gross income consists of passive income, or 50% or more of the average fair market value of its assets consists of assets that produce passive income.

Passive income includes, among other things, dividends, interest, rent, royalties and capital gains from the disposition of securities.

It is generally believed that virtually all Canadian mutual funds and ETFs are PFICs.  Certain public companies are also PFICs.

 

The Qualified Electing Fund (QEF) election on U.S. income tax returns

Include only the pro-rata share of the mutual fund’s earned income and capital gains for U.S. tax purposes.  This is roughly similar to how U.S. mutual funds are taxed in the U.S. and is generally aligned with how Canadian mutual funds are taxed in Canada.  There are other reporting options but in many cases the QEF election will be the most beneficial to U.S. tax filers.

 

What to do next

It’s recommended that you consult with your advisor and a U.S. tax expert.  PFIC rules are complex, and it is important for you to have the knowledge necessary to make informed decisions.  Affected investors should not make changes to their Canadian investment holdings without first speaking with their advisor and a U.S. tax specialist.

 

How do these rules affect different types of accounts, such as non-registered accounts, TSFAs and RRSPs?

These rules affect investments in non-registered accounts, TSFAs and RESPs.  For PFICs held in retirement savings accounts such as RRSPs and RRIFs, most tax advisors suggest the PFIC rules should not be applicable.  However, you should speak with a U.S. tax advisor.

 

Note:  this information is general in nature.  It should not be relied upon or construed as tax advice.