We are excited to share another success story of our client, who was facing a problem with PFIC. Check out Robin’s story and learn what applies to your case.
Robin, a dual-citizen between the US and Canada was contemplating selling some Canadian mutual funds.
Robin had been advised that mutual funds are PFIC as well as the punitive taxation regime of excess distribution. She was looking to sell them and invest in common stocks and bonds instead, which would not be subject to this taxation regime.
Many of these were purchased over a decade ago and selling them would subject Robin to an effective tax rate of 37% (due to the compounding impact of interest on taxes allocated over the holding period).
Robin approached me to get a second opinion. As it turns out, PFICs are investments in foreign corporations. Mutual funds are classified as trusts for Canadian tax purposes. But it is not relevant since only the US tax classification is taken into account when preparing a US tax return.
A corporation is an entity which provides its shareholders limited liability (i.e. protection from losing capital in excess to what was invested). I was able to show that some mutual funds did not enjoy limited liability (at least at inception, which is the time at which the classification is determined).
Since these were not a corporation, they were not PFIC and Robin was able to sell them while enjoying a tax rate of 15% on long-term capital gains, instead of 37%, thereby saving her thousands of dollars.
We then discussed the possibility of renouncing U.S. citizenship as going forward more of her income would come from investments, for which the foreign earned income exclusion is not applicable and the Canadian tax rates would be less than the U.S. tax rate.
Thanks to 1040 Abroad’s understanding of these advances tax issues, she was now at peace and saved thousands of dollars. Now Robin is proud to have the peace of mind that her tax situation has been dealt with correctly while legally minimizing her tax owing.