The US has a special tax treatment for what the IRS calls Passive Foreign Investment Companies (PFICs). Other countries may have similar rules, but this is the one I know about. This PFIC issue has snared many US investors who didn’t realize that the IRS may consider a Canadian mining stock to be a PFIC. Failure to file Form 8621 to disclose PFIC investments can cost you a bundle.
Before saying anything else, I want to stress that I am not a CPA nor any kind of tax expert; the bottom line is that investors should consult with tax professionals on this subject.
The idea of the PFIC rule is to prevent US taxpayers from avoiding higher income taxes under the guise of capital gains.
This applies to things like Canadian or other foreign mutual funds and pooled funds. Kitco pool accounts come to mind. Foreign exchange-traded funds (ETFs) and income trusts or real estate investment trusts (REITs) would also be covered. Canadian royalty companies like Wheaton Precious Metals (WPM) also seem like a natural target for the IRS.
But aggressive interpretation by an auditor could apply the rule to companies one might not see as passively generating income at all—like an exploration or mining company.
I remember hearing horror stories about this back in my Casey days. People often asked us for advice. How does one know if one might have a PFIC in one’s portfolio?
Of course, for liability reasons, we could only encourage readers to consult with a tax professional.
But my sense is also that the IRS application of this rule is somewhat random and arbitrary. It’s hard to be sure, even for seasoned investors.
That’s what makes the PFIC issue so dangerous. If it hasn’t come up for years, even in an audit, that doesn’t mean you’re safe from getting nailed in the future. After years of doing the same thing, you can suddenly be told you’ve failed to disclose PFIC income and fined for that failure. The penalties can be draconian.
And remember; just because you bought a stock on the US market doesn’t make the company a US company.
A Canadian (or other foreign company) whose stock you buy on US markets is still a foreign company and may be deemed a PFIC by the IRS.
Happily for me, my capital gains are governed by Puerto Rican law, not US federal law.
But resource investors—especially US investors who buy a lot of Canadian stocks—should be aware of this issue.
What to do?
I hate to sound like a broken record, but there’s really only one thing to do; consult with a tax professional. Ideally, he or she should have a lot of experience dealing with investments. I would not expect this of the typical H&R Block tax preparer.
Caveat emptor,
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