The Sun Life Betrayal Part 2 – The possible consequences of pension plans being PFICs



If you are a US citizen or permanent resident and have been living and working outside the US and investing your savings through a non-US financial institution, you need to learn what a Passive Foreign Investment Company (PFIC) is very quickly.

Why? Because the passage of the Foreign Account Tax Compliance Act (FATCA) in 2010 is ushering in a new era of dramatically heightened enforcement of US laws regarding taxation of and reporting on investments held outside the country by US Citizens or permanent residents

PFIC rules generally apply to investments held inside foreign pension funds, unless those pension plans are recognized by the US as “qualified” under the terms of a double-taxation treaty between the US and the host country.

If you don’t know what a PFIC is, here is PFIC 101.


My first post about the Sun Life capitulation focused on the conduct of Sun Life. Assuming  that the company does what it says, it will identify “U.S. persons” who are invested in pension plans that are under Sun Life administration. Sun Life will assist the IRS in its “hunt” for “U.S. persons abroad”. The great “Fox Hunt” has been replaced by the great “FATCA Hunt.”

Imagine, all these people have done is tried to save for retirement.  Why should this be a problem? The answer is that the pension plans are “foreign” and the investments in the plan are “foreign”. (Can you see a penalty coming?)  It’s sad but true. “U.S. persons abroad” have been disabled from retirement planning. There is a chance that these company pension plans will be a PFICs. If so, the investors will be subject to all the horror that this entails. Not a single person invested in a company pension plan that is a PFIC had a clue what was being done for  to them!

This second post is about the consequences of Sun Life assisting the IRS.

Let’s explore the consequences of the great Sun Life betrayal. What will happen to those clients who are turned over to the IRS for processing?

Here is the analysis.

1. Sun Life has made it clear that it intends to  determine which of their clients are “U.S. persons”. Sun Life is participating in the new sport of the 21st century – “The Great FATCA Hunt For U.S. persons”. If there is even a suspicion of being a “U.S. person” then Sun Life will report that person to the IRS along with a statement of their investments.

2. Once reported,  the “U.S. person” will be sent to the IRS for processing. the question is whether the “U.S. person” is tax compliant. If the answer is NO, the person with the “U.S. taint” must deal with the consequences of non-compliance. This is certain to be a problem. How big of a problem? Who knows? The reality is that most “U.S. persons abroad” are NOT tax compliant because they don’t even know they have to file. Many “U.S. persons abroad” don’t even know they are U.S. persons.  The person will be required to pay any U.S. tax owed, plus interest and possibly penalties.

3. One would think that if a  “U.S. person” had been filing returns there would no need for worry. You would think. Not necessarily so. Why? Leaving aside the issue of FBARs and other returns (which are valuable to the IRS only if NOT filed), there is the issue of the pension plan itself. Why should that be an issue? Aren’t people allowed to save for retirement? For “U.S. persons abroad” life is never easy. Here is why. The only retirement planning vehicle allowed under the Canada U.S. tax treaty is the RRSP (assuming that the form 8891 is filed). TFSAs and company pension plans are not. The TFSA is a “foreign trust” and is subject to the Form 3520 and 3520A requirements. In addition, a company pension plan may be  a PFIC. If so, it is subject to the most punitive tax system known to man. The taxes are such that they can wipe out all the gains. The reporting requirements are complicated, expensive and penalty-laden. The reality of PFIC horror has been well documented by its victims – including these words of a possible survivor:

 I resent that I’d been been completely acceptably investing in UK mutual funds for sixteen years and had made various plans on being able to retire well before 60, if not even 55. But, alas, I will now have to work till my late 60s or even 70s, like most everyone else…I feel bitter that I was trying to be prudent and plan ahead so I could escape the rat race. Things were going well and was building up a steady dividend stream that was free from UK capital gains taxes because they were in similar types of accounts to IRAs.  And then, lo and behold, I learned to my horror early last year about all the problems as a US citizen living abroad.  I had been oblivious to the onerous conditions that my US passport was giving me.

I wound up owing a five figure sum to the IRS because of the horrible PFIC rules, plus had to will have had to pay around $xx,xxx in total for all the accounting fees plus another $xxxx to set up a relationship with a dual-compliant UK/US financial planner.  I wound up having to move all my holdings out of PFICs into a US-compliant brokerage portfolio with much higher administrative charges so that my income has essentially halved.  The adviser also skims an annual charge of 0.5% of the value of the assets she’d invested for me.

I am angry, both because the investment magazine I largely relied on didn’t give any inkling to the anomalous treatment of US Persons investing abroad, nor even from the mutual funds themselves.  (They probably mentioned something in the small print but had erroneously assumed it only meant that US citizens not resident in the UK).  All very confusing.

4. So what happens when Sun Life reports your investment in a PFIC to the IRS? Through the combination of the taxes, penalties and compliance costs (form 8621 and professional fees)  you will lose the intended benefits of the plan. Read the  rules for the taxation of PFICs. The joke is on U.S. persons abroad who tried to save for retirement. Sun Life by reporting your retirement plan to the IRS will ensure that you don’t get the benefit of the pension.The simple truth is that the IRS will confiscate the benefits of the plan (through high taxes and reporting requirements) but leave you with the plan itself. Once left with the plan you are stuck with the administration and reporting requirements. As one badly abused commentator said:

I worked one year in a country where as a mandatory part of the Social Security system a private retirement account was opened for me by my employer.  The account is government controlled. I cannot close this account ever and can only get payouts if I am resident in that country, which I never will be again. I was there on a temporary work permit.  The IRS has not officially recognized this social security plan as anything other than a PFIC so I am stuck with paying taxes for the rest of my life on a PFIC that I will never get any money from.

“It’s not what  you take from someone, it’s what you leave then with!”

5. But, hey, America is exceptional. As a U.S. person you are exceptional. Exceptional people don’t need retirement plans.

6. FATCA is a form of capital control – the financial equivalent of the “Berlin Wall”. The U.S. wants to keep its people and its capital inside the U.S. When “U.S. persons abroad” have their retirement plans abroad, they are subject to unique reporting and tax requirements. As a result,  many financial advisers urge Americans abroad  to keep their investments in the Homeland (of course its easier for the IRS to access them in the U.S.)  If you have exactly the same investments in the Homeland you will NOT be subject to any of this insanity.

A number of U.S. based financial planners in the Homeland are now marketing their services – helping you keep your investments in the Homeland.

In conclusion, the conduct of Sun Life:

The insanity of “U.S. person based taxation coupled with FATCA” has made it impossible for “U.S. persons” to survive outside the U.S. The IRS is  confiscating the benefit of their investments through unfair taxes, penalties and expensive reporting requirements. Canada cannot allow the U.S. government to come into Canada and confiscate the retirement savings of Canadian citizens. Sun Life should NOT be assisting the IRS! Governments must be educated. Citizenship-based taxation is horrible and immoral. FATCA is nothing short of a declaration of war on the world. The pairing of citizenship-based taxation with FATCA has become a human rights abuse. Add the new IRS “Birkenfeld Whistle Blower Rewards” and there is good reason for U.S. persons abroad to live in terror.

Citizenship-based taxation and FATCA must be repealed now!

If you don’t want to return to the Homeland or you don’t want your investments in the Homeland then you must:

Renounce U.S. citizenship at the earliest opportunity.

And a concluding thought:

You don’t need Sun Life for protection, but you do need protection from Sun Life!


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