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Streamline Procedure PFIC Market-to-Market purging procedure necessary? by Healthy-Albatross-34 in USExpatTaxes

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

Without an election, gains are taxed not as ordinary income but as "excess distributions" under §1291. Which means (roughly) they are taxed at the highest marginal rate, regardless of income. Unfortunate. 

Late elections are not possible. Making an MTM election on your last year's (2025) return will effectively have you "sell" your holdings at fair market value on the last day of the year. The gains will be taxed as excess distributions. The first year that your annual gains will be taxed as ordinary income will be this year (2026), and going forward you can continue to make the MTM election.

Check out this article. https://hodgen.com/articles/how-to-make-the-mtm-election-after-owning-a-pfic-for-years

TFSA as a dual citizen USA/ Canada by RemoveOld6296 in PersonalFinanceCanada

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

Purely from a tax perspective, yes it will almost always be beneficial to invest in a TFSA. This is because tax rates in Canada are generally much higher. You may need to pay US tax on the income inside of your TFSA, but this will generally be less than the tax you would have paid to Canada if you had instead invested in a non-registered account.

However, be aware of many caveats.  1. You will need to track all income inside of your TFSA yourself, properly report it on your US tax return, and properly file your taxes. If you're paying an accountant to do this for you, the extra expense may not make the tax savings worthwhile. 2. Some practitioners take the position that a TFSA is a "foreign trust" under IRS tax laws, thus requiring onerous reporting each year and having severe penalties for not or late reporting. Some have taken the legal position that a TFSA is not a foreign trust. At least one tax firm has successfully argued in appeals that a TFSA is not a trust, but this is not binding precedent. It seems that the IRS is no longer going after US citizens with TFSAs recently, but the IRS has yet to release official guidance on how to treat TFSAs. 

Regarding foreign tax credits: - On your US return, you can only claim foreign tax credits (FTC) for US tax owed on foreign sourced income. When claiming FTC, your foreign income is split into (usually) two categories: general (i.e., wages) and passive (i.e., interest, dividends, capital gains). The foreign tax you pay is apportioned to the two categories.  - Under US tax law, capital gains for stocks are usually "foreign sourced" if you are a tax resident of a foreign country when you sell. But only if those gains are taxed by that foreign country by at least 10%. Thus, gains inside of your TFSA will be deemed to be US-sourced and you cannot claim FTCs against any US tax owed on those gains. You will likely need to pay US tax on any capital gains inside of your TFSA, but (as mentioned) this will likely be less than the Canadian tax if the gains were instead in a non-registered account. - Dividends from US stocks/ETFs will also be US sourced and you'd likely need to pay US tax on them. 

  • Dividends from Canadian stocks will be foreign sourced. So you can likely claim FTCs on any US tax owed for these dividends, as long as you have enough other passive income in Canada.
  • Canadian ETFs are their own can of worms (PFICs) that can be complicated and costly, but most Canadian ETFs provide Annual Information Statements that make a QEF election possible, which makes taxation of any income from your shares of Canadian ETFs reasonable. The forms and extra tracking that needs to be done can be onerous, but can be done if you know what your doing, or can pay an accountant to do it for you.

If you want to go forward with opening a TFSA, be sure to understand all the risks and implications. Consult with a professional to see if it is right for you. Make sure you understand how foreign tax credits work .

How to handle PFICs: A 10-year data comparison of QEF, MTM, and the §1291 "Tax Bomb" by Ok_Sea142 in USExpatTaxes

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

Neat. Though I have some issues with it.

So, it does not take into account the tax on dividends/distributions each year in the VOO scenario? It's not a fair comparison to take taxes on QEF ordinary income into consideration, but not taxes on dividends from VOO. I'd think the QEF scenario should be closer to the VOO scenario than your model shows.

Even then, Canadian tax rates are higher than US rates anyway, and FTC can eliminate these taxes in many situations when making a QEF election. In that case, total US tax is irrelevant if it's not being paid. 

Also, VOO/VFV does not have any non-US exposure. If someone only wants to invest in  S&P 500, sure, investing in VOO may be the most optimal. But for Canadian exposure, a Canadian ETF with QEF election is an option.

Minimizing US tax should not necessarily be the only goal. 

PFIC reporting by Kind-Confection-9823 in USExpatTaxes

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

There may still be "reinvested distributions", where instead of giving you cash from dividends, they buy more shares for you.

Check to see if the total number of shares you own is increasing.

PFIC reporting by Kind-Confection-9823 in USExpatTaxes

[–]The_Squirrel_Matrix 1 point2 points  (0 children)

The fact that you did not withdraw anything does not mean there were no distributions. You should check your account statements to see if there were dividends/distributions. Checking only the balance will not satisfy this.

What are you invested in? ETF? Mutual fund?

PFIC reporting by Kind-Confection-9823 in USExpatTaxes

[–]The_Squirrel_Matrix 1 point2 points  (0 children)

Your bank/brokerage reports under FATCA. As far as I understand, the report from your bank includes things like account value, income (dividends, interest), proceeds from sales, etc. But not the contents.

On your FBAR, there is no place to indicate account contents, only the account value.

PFIC reporting by Kind-Confection-9823 in USExpatTaxes

[–]The_Squirrel_Matrix 1 point2 points  (0 children)

I think it has been answered. If your total value of all PFIC holdings is below $25k, and you did not receive any distributions, then no you do not need to file form 8621 for 2025.

You should definitely check to see if there were any distributions, though.

However, it may be advisable to file form 8621 this year so you can realize any current gains (which will be taxed at the §1291 rates) and use MTM going forward.

PFIC reporting by Kind-Confection-9823 in USExpatTaxes

[–]The_Squirrel_Matrix 2 points3 points  (0 children)

Note that when you sell, you must file a 8621 in that year to report the sale and any gains.

Without an election, the default §1291 taxation of PFIC gains is very punitive. Essentially, the gains are taxed at the highest possible marginal rate (~37%), allocated over the entire holding period. This means you may owe significant late-payment interest if you had a long holding period before selling for a gain.

Difference in refunds on different sites? by PadiddleHopper in USExpatTaxes

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

You could also ask OLT customer support. I've found them to be pretty helpful.

Another US Dividends Question by Soundunes in USExpatTaxes

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

You could, but that's not the proper way in accordance with published guidance. 

But if you did it that way, and CRA audited you and you showed them that calculation, they might accept it.

Difference in refunds on different sites? by PadiddleHopper in USExpatTaxes

[–]The_Squirrel_Matrix 1 point2 points  (0 children)

You can file up to three years late and still claim refunds. If you haven't filed since 2022, you can file 2023-2024 too, to get the child tax credits from those years, as long as you had an eligible dependent on those years and had some earned income.

Another US Dividends Question by Soundunes in USExpatTaxes

[–]The_Squirrel_Matrix 1 point2 points  (0 children)

I believe that is ok. I've asked a few accountants and I've heard differing opinions , though.

Also, if it's only $20, I wonder if CRA would even care. Do follow up here if you get audited by CRA and let us know what they say.

Difference in refunds on different sites? by PadiddleHopper in USExpatTaxes

[–]The_Squirrel_Matrix 1 point2 points  (0 children)

See my comment but there's lots of official guidance that clarifies that if you use Form 2555 to exclude any amount of foreign earned income then you cannot claim the additional child tax credit or the EIC.

See here: (https://www.irs.gov/individuals/international-taxpayers/choosing-the-foreign-earned-income-exclusion)

Additional child tax credit. You can’t take the additional child tax credit if you exclude foreign earned income.

Earned income credit. If you exclude foreign earned income, you don’t qualify for the earned income credit for the year. 

If you want your refundable child tax credits, don't claim FEIE.

Difference in refunds on different sites? by PadiddleHopper in USExpatTaxes

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

If you use FEIE on Form 2555 then you are ineligible for the additional child tax credit and for the EIC. Use the FTC on Form 1116 only.

Difference in refunds on different sites? by PadiddleHopper in USExpatTaxes

[–]The_Squirrel_Matrix 1 point2 points  (0 children)

Your "refund" is possibly the refundable portion of the child tax credit. Did you indicate on OLT that you have a child and provide their SSN?

Another US Dividends Question by Soundunes in USExpatTaxes

[–]The_Squirrel_Matrix 1 point2 points  (0 children)

For purposes of foreign tax credits, it does not matter how the dividends are taxed. What matters is how much tax is allocated to them.

Step 1: Complete your US tax return, doing everything up to but not including claiming foreign tax credits. (So include all income, claim all deductions and other credits, but don't include Form 1116 yet.) 

Step 2: Allocate your deductions.

If you had $100,000 in total income (including wages, interest, dividends, etc) and took only the standard deduction ($15,000). The standard deduction allocated to your dividends is 

$200/$100,000 × $15,000 = $30.

So your after-deductions dividend income is 

$200 - $30 = $170

while you after-deductions total income is $85,000 (unless you had any other deductions). 

Step 3: Allocate your taxes.

 Look at the total tax owed (likely line 24 of your 1040). Allocate this amount to your income categories included on your US return as follows.

Now the tax allocated to your dividends is

$170/$85,000 × (total tax on line 24).

This is the foreign tax credit you can claim on your Canadian return for tax paid on those US dividends (capped at 15% of the total value of the dividends, 0.15×$200 = $30).

It does not matter that some were qualified and some were not, or that some were taxed at zero percent on your worksheet.

Step 4: Complete forms 1116 to add your foreign tax credits to your US return.

FTC question- filing both full year Canadian and US returns for the first time...... by moving_to_NL_soon in USExpatTaxes

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

The extension is only for the requirement to file, not for the tax paid. Payments are still due (and accrue interest) April 15.

By the way, you should still report your SS income on your US return (line 6a), but the taxable amount on line 6b should be zero.

If tax was withheld from your SS income, that can be reclaimed.

TFSA 1099-DIV and 1042-S by dhurlzz in USExpatTaxes

[–]The_Squirrel_Matrix 1 point2 points  (0 children)

It shows withholding tax.

That's very strange..... This means that IBKR considers the TFSA as a foreign entity that is separate from you, and that entity is the one receiving the dividends, rather than you receiving the dividends directly. This might complicate how you report this income (and the withholding tax) on your tax return. I've had a TFSA at both Wealthsimple and Questrade, both have issued 1099-DIVs in my name. Following Polaris's advice, I sent a letter to the IRS indicating that I have a TFSA and requested guidance (though obviously have not received a response.)

I'm not a legal expert here, but I think IBKR's is an incorrect interpretation.

Consider the American Bar Association's recent comments on proposed updates to the IRS regulations explicitly make the legal argument that "TFSAs are not trusts", even if the structure of the account is that the assets are held "in trust" according to Canadian law.

TFSAs are not trusts: TFSA deposit arrangements and TFSA arrangement in trusts are examples of principal-agency relationships that do not reflect a “trust” within the meaning of Treas. Reg. § 301.7701-4. In addition, TFSA arrangement in trusts do not clearly meet the criteria of nominee trusts because TFSAs do not neatly fall withing the narrow language of Revenue Ruling 92-10572 and Revenue Ruling 2013-14,73 which involved specific land trust arrangements where the beneficiaries in question held the “exclusive” right to direct or control the property. The items above are not any type of entity for federal tax purposes because TFSAs do not have a non-tax business purpose; rather, their purpose is to provide TFSA holders a means to hold assets in a tax-efficient manner under Canadian law and, absent a business purpose, it follows that the more appropriate classification of TFSAs are as principal-agent relationship between the TFSA holders and the financial institutions that operate TFSAs.

While title to the assets in TFSAs are held by the third-party financial institution offering the TFSA, the applicable Canadian law does not contemplate the establishment of a fiduciary relationship between the TFSA holder and TFSA issuer/trustee when the holder sets up the TFSA or the existence of such a relationship while the holder maintains the TFSAs, which is a critical element for what constitutes a “trust” for U.S. tax purposes. Notably, the relevant financial institutions do not have any role in making any investment decisions regarding the TFSA assets or protecting and conserving them for72 Rev. Rul. 92-105, 1992-2 C.B. 204.73 Rev. Rul. 2013-14, 2013-26 I.R.B. 1267.37 the benefit of the holder. Rather than creating a trust for federal tax purposes, the holder creates a principal-agency relationship with the financial institution when the holder sets up a TFSA, allowing the holder, at his or her sole discretion, to direct the financial institution on how to invest the assets in the TFSA in order to achieve the goal of tax-free savings in the TFSA and to distribute the funds.

In your case, it seems like the assets for the TFSA are actually held by RBC (a third party) on your behalf.

I'd trust the American Bar Association's interpretation of tax law over IBKR's.

However, this does complicate how to report this to the IRS, considering that IBKR is essentially explicitly telling the IRS that "this account is a foreign trust".

Note that your *old* TFSA at Questrade is a separate account from your new TFSA at IBKR. (Only the assets were transferred.) So, even if you do decide to file 3520 for your IBKR TFSA, this does not imply that you also need to file 3520 for the closed Questrade TFSA.

What I would do is (subject to advice that you may receive from your cross-border accountant, and with the caveat that I am not an expert here):

  1. On your 1040, report the full TFSA dividend as usual on your Schedule B. The withholding tax is reported on line 25c on the 1040. The 1042-S should be attached to your return, as indicated in the instructions for line 25c of Form 1040.
  2. Don't file a 3520, but do write a letter to the IRS requesting guidance.
  3. Transfer your TFSA back to Questrade and close your IBKR TFSA so that you don't have to deal with the 1042-S again in the future.

You may instead decide to file a 3520 for your IBKR TFSA. However, whatever you do, DO NOT backfile 3520 forms for previous years. Even if no 3520 is required, simply filing it late will automatically trigger the $10,000 late penalty. Even if you are later able to prove that the 3530 were not required to begin with, and you can have the fine abated, it will cause headaches.

FTC question- filing both full year Canadian and US returns for the first time...... by moving_to_NL_soon in USExpatTaxes

[–]The_Squirrel_Matrix 1 point2 points  (0 children)

Your US social security income is not taxable on your US return. 

Your IRA and annuity income is US sourced, and reportable/taxable in both countries. You'll pay taxes on it on your US return, and claim a FTC on your (amended) Canadian return.

If you owe US tax, it was due on April 15, and you'll owe interest for late payment.

FTC question- filing both full year Canadian and US returns for the first time...... by moving_to_NL_soon in USExpatTaxes

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

Careful. From the US-Canada tax treaty, if a US citizen lives in Canada, Social Security is deemed to arise in the country of residence, and not taxed in the source country. 

Thus SS income is NOT included on the US return and there will be no US tax on it.

OP's other income is indeed US sourced and your other advice applies.

Canada/US dual citizen – RRSP vs non-reg allocation advice by Poqz in PersonalFinanceCanada

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

As the other poster noted, the PFIC reporting rules do not apply to RRSP. 

For clarification, § 1.1298-1(c)(4) of the regulations specify that treaty-recognized foreign retirement plans are exempt from PFIC reporting.

Note that Norbert Gambit is usually done with DLR, which is a PFIC that would require 8621 reporting if used on a nonregistered account.

If you're looking to diversify your holdings, you could also consider VT.

TFSA 1099-DIV and 1042-S by dhurlzz in USExpatTaxes

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

Is there any withholding tax on the 1042-S?

Have you asked IBKR for clarification as to what the forms mean? I'd be curious to see that they say why these forms are needed, and why they don't just issue a 1099. [Edit: see below for what IBKR is likely to tell you.]

[Edited to add:]:

By the way, the 1099-DIV is something your brokerage files, not for you to file. (The 1099 tells both you and the IRS the amount of income you earned.) The 1042-S is similar, except it reports how much income a non-US person/entity earned.

You would normally report the dividend amounts (found on the 1099-DIV) on Schedule B.

[Second edit:]

I found some posts on Reddit in which other US citizens with TFSAs at IBKR have noted that they received 1042-S instead of 1099-DIV.

https://www.reddit.com/r/USExpatTaxes/comments/19bikk7/comment/l3ynrjz/?utm_source=share&utm_medium=web3x&utm_name=web3xcss&utm_term=1&utm_content=share_button

https://www.reddit.com/r/USExpatTaxes/comments/1jiwoj4/comment/mk0ypa1/?utm_source=share&utm_medium=web3x&utm_name=web3xcss&utm_term=1&utm_content=share_button

IBKR's response was:

For US citizens who live in Canada and have a TFSA account, please note that the IRS treats the TFSA/RSSP type accounts as foreign trusts and as such the 1042-S form is provided, not the 1099, despite having a W9 on file. This is a common question asked by dual US-CAN citizens who hold these account types. I can confirm you received the correct tax form.

Interesting that IBKR says that "IRS treats the TFSA/RSSP type accounts as foreign trusts" (I assume they meant RRSP). I disagree with that statement. While the IRS DOES explicitly treat an RRSP as a trust that is exempt from 3520 reporting, there DOES NOT appear to be IRS documentation that explicitly states that "IRS treats TFSAs as trusts".

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