Designing and implementing an effective long-term wealth management strategy can often be a complex undertaking for “cross-border” families. Not only must you consider potential changes in market conditions and shifts in compliance rules, but other complexities, like non-resident financial products and international estate planning, must also factor into the equation.

That’s why it’s so important for Canadians to familiarize themselves with Passive Foreign Investments Companies, or PFICs, when holding offshore investment accounts as residents of the U.S.

PFICs are “pooled investments” registered outside the United States. They typically encompass Canadian-traded mutual funds and exchange-traded funds but may also include other financial products, such as hedge funds, insurance products, and non-U.S. pension plans.

In some cases, you may even run into problems with a bank account that’s a money-market fund rather than a straight deposit account. For all intents and purposes, money-market accounts are short-maturity fixed-income mutual funds, therefore subject to PFIC taxation.

Furthermore, PFIC rules often apply to investments held inside foreign pension funds unless the U.S. recognizes the plan as “qualified” under the terms of a double-taxation treaty between the U.S. and host country.

What does this mean, exactly?

Taxation Issues for PFICs

Holding PFICs can lead to very harsh income tax consequences, as the tax treatment for PFICs is extremely high compared to similar investments incorporated in the U.S.

Let’s say you hold a U.S.-incorporated mutual fund. You pay a low long-term capital gains rate of 15 percent when held for more than one year. If you were to buy a nearly identical fund listed in Canada, you’re now subject to PFIC taxation.

PFIC taxation means that the fund is automatically taxed at the top individual rate, currently set at 39.6 percent. And depending on the investment, you could see the total tax reach upwards of 50 percent or more.

Compounding the issue even further is capital losses. With non-resident funds, losses cannot be carried forward or used to offset other capital gains. Plus, those non-U.S. accounts are subject to FACTA compliance and come with their own reporting, disclosure, and compliance obligations.

Implications of Broker-Dealers Not Register in the U.S.

Besides the potential tax issues, you must pay close attention to the licensure of your Canadian broker or investment firm. If a firm isn’t licensed in the U.S. and you’re subject to SEC rules as a U.S. resident, your account could be frozen, preventing you from giving trading instructions.

The PFIC rules are just one of many reasons why U.S.-resident investors should keep investment funds in U.S. accounts. Even when investing globally, keep funds in U.S. accounts. It’s just makes practical sense. When it comes to wise and efficient investing, savvy investors keep their wealth invested globally, but through U.S. financial institutions when U.S residents.

To learn more about this and other wealth management strategies for foreign nationals, download our white paper: 7 Keys to Wealth Management for Canadians Living in the U.S. At www.campbellwa.com or contact us by email at: info@campbellwa.com  Or by phone at: (952) 474-1270

Investment Advisory Services offered through Retirement Wealth Advisors, (RWA) a Registered Investment Advisor.  Campbell Wealth Advisors LLC and RWA are not affiliated. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

This information is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Campbell Wealth Advisors LLC and its affiliates do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney.