I’ve got an account in the Bank of the Republic of the Marshall Islands and I do not report *squat* on it. When the day comes that I withdraw money from it I’ll pay taxes on it then. Until that time the IRS can bite me.
1. Did you invest U.S. dollars in this fund, or Canadian dollars?
2. Have you been paid any dividends on this investment?
3. Have there been any capital gains reported within the fund?
Income test75% or more of a corporations gross income in a particular year is passive income.
Asset testthe average value of passive assets held by a corporation during a particular year is 50% or more of its total assets. US persons who are shareholders of a PFIC are subject to the PFIC rules regardless of the size of their interest in the PFIC. The rules for PFICs are designed to eliminate the benefits of a tax deferral where a PFIC earns income, but does not distribute it on a current year basis. However, the PFIC rules can apply even if the foreign entity does distribute all of its income on an annual basis.
Taxation of US Shareholders 4.3.1 Excess Distribution Distribution Regime (section 1291) 4.3.1.1 Overview The excess distribution regime is the default regime that applies when a US shareholder in a PFIC has not elected under either the mark to market or QEF regimes. The purpose of this system is to approximate the tax that would have been imposed if the PFIC had distributed all income earned each year on a current year basis. The excess distribution rules are designed, in general, to prevent the accumulation of passive income in a foreign entity in a manner that defers US tax. This is generally considered the most punitive of all of the possible PFIC tax regimes and should be avoided if possible. 4.3.1.2 Inclusion of PFIC Income A tax liability under the excess distribution rules arises only when an actual distribution is made by the PFIC, or when the US investor disposes of his or her investment in the PFIC. The annual distribution from a PFIC will be broken into two parts: 1. amount taxed in the current year as ordinary income, and 2. the excess distribution amount (which includes an interest charge). Calculation of Excess Distribution Amount: The excess distribution amount arises when there is either an actual distribution from the PFIC or when a gain is realized on the disposition of the PFIC stock. All of the gain on a sale is treated as an excess distribution. A loss on a sale is generally not recognized. The rules are applied on a PFIC by PFIC basis (i.e., distributions received by a US investor from more than one PFIC in a year are not aggregated). Also, the calculations are done on a share by share basis. Therefore, adjustments must be made for blocks of shares purchased on different dates. A distribution is an excess distribution only to the extent the total of actual distributions during a year to a shareholder exceeds 125% of the average of actual distributions received in the three preceding years (or if a shorter holding period, the portion of the shareholders holding period before the current year) (i.e., excess distributions are really defined by reference to prior year distributions). The total amount of the excess distribution is allocated on a pro rata basis to all days in the investor's holding period. This can potentially result in an allocation to three periods 1. "pre-PFIC period," (days in the investor's holding period prior to the time the foreign entity was a PFIC); 2. "current-year period," (days in the year in which the excess distribution occurs); and 3. "prior-year PFIC period," (days in the prior years during which the foreign entity was a PFIC). Amounts allocated to the pre-PFIC period and the current-year period are totaled and included in the US investor's income as ordinary income. The amount allocated to the prior-year PFIC period is subject to the highest marginal rate of tax for the year to which allocated, and each of the resulting tax amounts attracts an interest charge as if it were an underpayment of taxes for the year in question. Importantly, amounts allocated to the prior-year PFIC period are never included in the investor's regular income. Instead, the tax and interest determined under these rules (the "deferred tax amount"), is added to the investor's tax liability, without regard to other tax characteristics of the investor. Therefore, the deferred tax amount is a payable tax liability, even where the investor otherwise has a current year loss or loss carryovers. The portion of the excess distribution allocated to the current year does not include an interest charge. The calculation above is done in Part IV of IRS Form 8621 Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund available at http://www.irs.gov/pub/irs-pdf/f8621.pdf. Instructions on completion of the form are available at http://www.irs.gov/pub/irs-pdf/i8621.pdf . Example 1 John, a US person, purchases 100 units of ABC mutual fund on January 1, 2004. ABC is a PFIC for all relevant years. John does not make a QEF or mark to market election with regard to his units in ABC. ABC makes no distributions in 2004. On December 31, 2005, ABC distributes $100 to John. The entire $100 is an excess distribution because Johns base period average is zero. This is because there were no previous distributions from the PFIC to John. The distribution is allocated to all days of John's holding period, up to and including the date of distribution. Consequently, $50 is allocated to 2004, and $50 is allocated to 2005. The $50 allocated to 2005 is included in John's income as "other income and taxed at regular marginal rates. The $50 allocated to 2004 is taxed at the highest individual tax rate for 2004 and attracts an interest charge for the period. Example 2 The facts are the same as in Example 1, except that ABC distributes $100 to John on January 1, 2005 instead of December 31, 2005. The distribution is allocated to the days in the period from January 1, 2004 through January 1, 2005. As a result, virtually all of the distribution is allocated to 2004, ABCs prior year. Instead of $50 being allocated to 2004, almost $100 is allocated to 2004. Tax is imposed at the highest rate for 2004, and that tax draws an interest charge. The base on which the interest is determined is doubled, and the resulting interest charge is doubled, as compared to Example 1. Example 3 (purchases on different dates) A US individual owns 12 shares of FC, a PFIC, acquired as follows: --2 shares on December 31, 2002 (Group 1) --4 shares on December 31, 2003 (Group 2) --6 shares on December 31, 2004 (Group 3) On June 30, 2003 and 2004, FC distributed $10 to each outstanding share. No portion of either distribution was an excess distribution. On June 30, 2005, FC distributed $30 to each outstanding share. For 2005, the excess distribution would be calculated for each group of shares. Group 1The excess distribution is $35 ($60 received less 125% of ((20+20)/2) (2 years of holding prior to distribution). Group 2The excess distribution is $70 ($120 received less 125% of 40) (1 year of holding prior to distribution.) Group 3No excess distribution because the first year of the holding period is 2005, the year of distribution. Avoiding the Excess Distribution Regime: Once a foreign corporation qualifies as a PFIC at any time during the US investors holding period, any subsequent distribution by the PFIC to, or disposition of the PFIC stock by the investor, will be subject to the excess distribution rules, regardless of whether the foreign corporation is a PFIC in the year of the distribution or disposition, unless the US investor elected QEF status on a timely basis. This can be avoided in one of three ways: 1. QEF Election in First Year of PFIC Status (and in subsequent years if certain procedures are followed) (section 4.3.3) 2. Marking PFIC stock to market and treating accrued gain as an excess distribution (section 4.3.2) 3. Recognizing Post-1986 Earnings and Profits of Controlled Foreign Corporations Other: · Once a foreign corporation qualifies as a PFIC, all subsequent distributions or dispositions will be considered to be made by a PFIC regardless of whether the foreign corporation is a PFIC in the particular year (unlike when a QEF election is made). Miscellaneous Items: Deemed distributions or dispositions of indirectly held PFIC stock may also be subject to the excess distribution rules. Return of capital distribution could be classified as an excess distribution. Non-recognition provisions that generally apply to certain transfers of stock do not apply to transfers involving PFIC stock (cost basis adjustments will normally apply). Amounts treated as excess distributions have their own special foreign tax credit rules. No part of a distribution received or deemed received during the first tax year of the shareholders holding period will be treated as an excess distribution. Its possible that amounts may not be taxable to a shareholder of a PFIC that is a tax exempt organization (e.g. U.S. charity)
Go see a tax advisor
Good luck!!
I believe that if its in an IRA or 401K, you don’t have to pay any special taxes other than the normal income taxes when it is withdrawn.
I’ve transferred all I can into Roth accounts so I don’t have to worry about any taxes.
These guys look like the understand the implications
http://www.rpifs.com/offshoretax/otpfic.htm
Here is a discussion on Canadian stock
http://www.assetprotectioncorp.com/taxonforeignstock.html
Here is a CPA forum. Be careful they tend to be overly cautious
http://www.accountantforums.com/foreign-stock-taxation-t12474.html
http://www.cdnbusinessdirectory.com/taxes/33800-foreign-stock-taxation
Here are two that discusses a retirement platform
http://www.cdnbusinessdirectory.com/financial-planning/41696-foreign-stock-ira-taxation-issue
http://www.beansmart.com/financial/Foreign-Stock-in-IRA-Taxation-Issue-2623-.htm
Hello E. Pluribus Unum:
Thank you for your interest in Central Fund of Canada Limited.
Please go to our website, www.centralfund.com and click on "Financials".
Down the page, you'll come to Notice of U.S. Tax Information for U.S.
Persons. This is a statement we send out to brokers and shareholders to
inform you that Central Fund has No Ordinary Earnings and No Net Capital
Gains to pass onto our shareholders because we do not sell our bullion.
At the bottom of this statement , you will find a link to the IRS Form 8621
and instructions for completing it. You should file the IRS Form 8621 in
the first year that you hold CEF and in the year that you realize any gains
on the sale of the shares. The Form 8621 simply tells the IRS that you have
invested in a Passive Foreign Investment Company (PFIC) which has no income
and no capital gains from its holdings.
Just check off Box A of Part I (QEF Election) and then in Part II, 1a, b and
c AND 2a, b and c are all 'zero'. The zero comes from the Statement telling
you that Central Fund has NO ordinary earnings and NO capital gains.
Central Fund is a Canadian company and you can ask your US tax advisor for
help with this if need be.
Please get in touch if you have further questions.
Yours truly,
Marda Jeffrey, Investor Services
Central Fund of Canada Limited
905-648-7878
In general, PFICs held in a Traditional or Roth IRA don’t have any consequence to your since they’re tax-deferred anyway.
However, for the PFIC shares held in the taxable account, you’ll want to:
(1) Report your holding each year on Form 8621;
(2) Make a QEF election under Part II or a “Mark to Market” election under Part III of Form 8621. If you don’t make one of those elections, you’ll get whacked with the punitive “interest charge” upon disposition.