Year End Planning – U.S. Citizens Who Own Canadian Mutual Funds

November 10, 2015

U.S. citizens living in Canada face adverse US income tax consequences where they own Canadian or other non-U.S. mutual funds. If you are not sure how the US’s “Passive Foreign Investment Company” rules apply here, please see our previous blog entry US Persons Holding Non-U.S. Mutual Funds.

If you are familiar with this issue, then you know that certain distributions and sales of non-U.S. mutual funds often result in unexpected U.S. tax liabilities and significant and expensive disclosure and reporting on your annual US income tax return. For many U.S. citizens, the choice to sell non-U.S. mutual funds is a difficult one due to unrealized gains triggering high rates of U.S. tax. Current market conditions should prompt U.S. citizens to rethink such a strategy.

In 2015, the Canada dollar continued its decline against the US dollar. At the same time, the major North American and European indexes have also declined in value, resulting in a potential 15-25% decline in the value of Canadian mutual funds in Canadian dollars during 2015. While obviously disappointing to us all, it may represent an opportunity to sell or consolidate some or all of your mutual funds with minimal or no U.S. tax liability. A sale of non-U.S. mutual funds and purchase of investments not meeting the definition of Passive Foreign Investment Companies can reduce your U.S. tax liability and the annual cost of preparing your U.S. tax return.

There is time between now and the end of the year to execute such a strategy. Before selling, you should discuss the plan with your accountant and financial advisor to ensure all tax and non-tax issues are considered.

We have discussed this idea in the past and other ways to use elections under US tax law to minimize the adverse US tax implications of owning non-U.S. mutual funds. Further detail can be found at this blog entry Now Is The Time For Some Year-End Mutual Fund and ETF Planning.