Investments Effectively Prohibited To Canada U.S. Dual Citizens

“There has been a lingering question about the US tax treatment of Canadian Mutual Funds in taxable accounts.  This discussion does not apply to investments in RRSP accounts.  In early 2010, the Internal Revenue Service issued a determination that most Canadian Mutual Funds are corporations for US tax purposes, even though they are organized as trusts under Canadian law.  Because they are corporations, most Canadian Mutual Funds are Passive Foreign Investment Companies (PFIC).

A PFIC investor has burdensome US tax reporting as well as potentially confiscatory taxation.  If a PFIC provides certain required information, the tax burden can be lessened, but this is not practical for must Canadian Mutual Funds.

There are two solutions—one short-term and one permanent.  On a short-term basis you can report income on a “marked to market” basis in your US income tax return.  This means that the change in value during the year will be reported as ordinary income.  This, of course will, require additional valuation information each year, but it will avoid potential tax and interest charges that have the potential to exceed 100% of the income from the investment.

The second solution, and the one I recommend is divest your portfolio of all foreign mutual funds and invest in individual security issues.  While this may not sound like a sensible solution for the Canadian investor, but it is the price of being a U.S. taxpayer.”

Bradley Kirschner – Seattle Based CPA

Thank you Mr. Kirschner for the succinct advice!

The U.S. tax laws –  in practical effect – prohibit U.S. citizens living in Canada from rational retirement planning and investing. This  is yet another reason to renounce U.S. Citizenship.

Here are examples of normal activities which will create burdensome, expensive and time wasting U.S. tax and reporting obligations. The financial, emotional and time costs of compliance with the IRS are a yet another reason to renounce U.S. citizenship.

–        Foreign based mutual funds – as Mr. Kirschner states get rid of them now!

–        RRSPs

–        RESPs

–        TFSAs

–        Canadian Controlled Private Corporations – ever hear of Subpart F income?

–        Certain Life Insurance Policies – that cash value is there for the IRS

–        An owner occupied principal residence (no joke – the sale is taxable while the proceeds are exempt in Canada)

If you can think of more examples, post a comment.

To repeat what you already know, under U.S. law you have both:

  1. Tax requirements – 1040
  2. Information reporting requirements – FBAR, Son of FBAR (effective 2011)

The U.S.A. = “The land of the forms and home of the bureaucracy”

The compliance costs are enormous. Given recent events, most people will feel the need to use expensive tax professionals. The likely cost will be in the thousands per year. Multiple that over a lifetime – not to mention the stress and time.

U.S. Citizenship – It’s time for it to go!

Although I do not know these people, here are links to more lucid posts on this topic:

8 thoughts on “Investments Effectively Prohibited To Canada U.S. Dual Citizens

  1. Michael Lalonde

    A small, even tiny, observation. The first $250K of capital gains on the sale of a principal residence are tax exempt in the US. If you’re a married couple filing jointly, then it’s the first $500K. So the typical sale of a principal residence will not produce US taxation. That said, my US citizen parents bought their house in the early sixties for something like $15K, and now it’s worth over $700K: such is the housing market in some Canadian cities. I keep trying to get them to renounce, as I already have.

    1. renounceuscitizenship Post author

      Yes, thank you very much for your comment/observation. I actually did a separate post on the principal residence here. My point in the following post is that the tax on the principal residence makes upward mobility difficult. Then if you live in Toronto, Canada, that has a city land transfer tax, it gets harder still.

      1. Lynda Jao

        Thank you for the answer! Would this all be inapplicable if your take home net income was less than what can be excluded? e.g. $92K I believe? Oy, renounce citizenship > $92K lol.

  2. Pingback: Money Markets As Pfics |

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