Taxation of Investments Owned by United States Persons

KNOWLEDGE EXPECTED OF: CFP® Professionals

Highest Knowledge Level: Understanding

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.


Additional Knowledge Expected of CFP Professionals

Taxation of Investments Owned by United States Persons 

  • Identify types of accounts that a United States Person may have to report under the Report of Foreign Bank and Financial Accounts (FBAR), such as:
    • Personal financial accounts which they own or for which they have signing authority
    • Commercial financial accounts at a business for which they may have ownership or signing authority
    • Trusts for which they have signing authority
    • Estates for which they have signing authority 
  • Define types of foreign corporations denoted under the Internal Revenue Code of the United States, such as: 
    • Controlled Foreign Corporations (CFC)1
    • Passive Foreign Income Company (PFIC)2
  • Identify that any United States Person who as a shareholder owns greater than 10% of the stock in a Controlled Foreign Corporation (CFC) must report and include a share of the income of the corporation in their personal income. 
  • Identify accounts where a United States person may be responsible for reporting the ownership of a passive foreign income company, such as:
    • Non-Registered
    • Registered Education Savings Plan
    • Tax-Free Savings Account 
  • Identify types of investments that may be considered a Passive Foreign Income Company, such as:
    • Canadian mutual funds
    • Canadian exchange traded funds (ETF)
    • Canadian income trusts
    • Canadian pooled funds 
  • Identify when a United States Person may be exempted from reporting ownership of a passive foreign income company (PFIC), such as:
    • No distributions from the passive foreign income corporation (PFIC) occurred during the year
    • No dispositions of the passive foreign income corporation (PFIC) occurred during the year
    • Year-end value of all passive foreign income corporations (PFICs) held is less than $25,000
    • The passive foreign income corporation (PFIC) is held in a registered pension plan, Registered Retirement Savings Plan or Registered Retirement Income Fund 
  • Identify that there may be tax implications when holding passive foreign income corporations (PFIC). 
  • Explain the tax treatment applied to a passive foreign income corporation (PFIC) owned by a United States Person who fails to report and file an election for the passive foreign income corporation (PFIC) they own, such as:
    • Any gains upon disposition or distributions received from the passive foreign income corporation (PFIC) during the year greater than 125% of the average distributions received during the previous three years will be taxed as ordinary income (i.e., back to the commencement of ownership of the passive foreign income corporation (PFIC))
    • Amounts allocated to prior years will be taxed at highest marginal tax rate and subject to interest 
  • Identify that the passive foreign income corporation (PFIC) rules do not apply in the first year of owning the PFIC. 
  • Identify that there may be additional U.S. tax impacts for an individual with a business interest in a private Canadian corporation. 
  • Identify factors that an individual should consider before renouncing their citizenship to avoid the reporting and tax requirements of a United States person, such as:
    • Legal and tax filing 
    • Tax filing requirements
    • Expatriation tax
    • Administrative costs
    • Loss of access to enter United States
    • Loss of ability to work in United States
    • Loss of potential benefits to current or future children of being U.S. person
    • Loss of voting privileges in United States
    • Amount of potential current and future tax being saved

Investing in Canadian Registered Plans by United States Persons 

  • Explain how registered retirement savings plans owned by United States persons are treated by the Internal Revenue Service, such as: 
    • Deductibility of contributions
    • Growth of assets while assets remain in plan
    • Income earned within plan
    • Withdrawals from plan 
  • Identify the impact of employer contributions to a Registered Pension Plan (RPP) or Deferred Profit-Sharing Plan (DPSP) for United States persons residing in Canada when completing their United States tax return. 
    • Non-deductibility of contribution amount
    • Contribution taxable when vested
    • Excluded from foreign earned income exclusion
    • Foreign tax carryover credit may be applicable

REFERENCES

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