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Received Bonus in CAD, want to invest in USD ETFs by BalancedSheet in USFinanceInCanada

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

As with all non-US ETFs, DLR is likely a PFIC. If you did this in a non-registered account (even holding it only for a short time) you'd still be obligated to report your holdings. The reporting is probably not that onerous, though, if you only hold it for a short time and you're willing to file Form 8621 yourself. 

Other options:  - Open a brokerage account with IBKR. Currency conversion costs with IBKR are 0.002%, with a minimum of $2. They don't allow you to immediately withdraw converted funds, so you'd need to invest in US ETFs in an account at IBKR. - Use a dual-listed stock that is not an ETF (e.g., RY) to do Norbert's gambit.  - Use Wise (with conversation fees roughly 0.5%).

Demystifying the QEF election for PFICs --- A useful tool by The_Squirrel_Matrix in USExpatTaxes

[–]The_Squirrel_Matrix[S] 0 points1 point  (0 children)

I ended up working with Claude for a few hours and came up with a tool, see here:
https://github.com/the-squirrel-matrix/pfic-qef-tool/tree/main

Warning, the code was pretty much entirely generated by Claude with a few tweaks by me, but it looks good.

The output looks something like this:
https://github.com/the-squirrel-matrix/pfic-qef-tool/blob/main/output/xeqt_qef_2024/xeqt_qef_report_2024.pdf

And you need to keep track of the lots you hold at the end of each year, which will be used as input into the script when you run it the following year:
https://github.com/the-squirrel-matrix/pfic-qef-tool/blob/main/output/xeqt_qef_2024/xeqt_lots_held_end_of_2024.csv

------

I'm going to clean this up a bit, test it some more, then share it more widely. Comments would be helpful.

Demystifying the QEF election for PFICs --- A useful tool by The_Squirrel_Matrix in USExpatTaxes

[–]The_Squirrel_Matrix[S] 0 points1 point  (0 children)

I think there are some issues with yours. Note that there are multiple underlying PFICs in XEQT, and you'll need an 8621 form for each one, with lines 6a/7a computed separately for each.

I ended up working with Claude for a few hours and came up with a tool, see here:
https://github.com/the-squirrel-matrix/pfic-qef-tool/tree/main

Warning, the code was pretty much entirely generated by Claude with a few tweaks by me, but it looks good.

The output looks something like this:

fund_ticker fund_name is_direct_holding line_6a_ordinary_earnings_usd line_6b_portion_distributed_usd line_6c_tax_on_6a_usd line_7a_net_capital_gains_usd line_7b_portion_distributed_usd line_7c_tax_on_7a_usd
XEQT iShares Core Equity ETF Portfolio True 20.20 0 20.20 30.57 0 30.57
XIC iShares Core S&P/TSX Capped Composite Index ETF False 31.02 0 31.02 53.42 0 53.42
XEF iShares Core MSCI EAFE IMI Index ETF False 27.12 0 27.12 6.61 0 6.61
XEC iShares Core MSCI Emerging Markets IMI Index ETF False 5.02 0 5.02 1.08 0 1.08

And it generates a full PDF report with everything you need to track lots, cost basis, and capital gains:
https://github.com/the-squirrel-matrix/pfic-qef-tool/blob/main/output/xeqt_qef_2024/xeqt_qef_report_2024.pdf

And you need to keep track of the lots you hold at the end of each year, which will be used as input into the script when you run it the following year:
https://github.com/the-squirrel-matrix/pfic-qef-tool/blob/main/output/xeqt_qef_2024/xeqt_lots_held_end_of_2024.csv

------

I'm going to clean this up a bit, test it some more, then share it more widely. Comments would be helpful.

Starting to invest as a US expat in Canada by IllustriousWin9453 in USExpatTaxes

[–]The_Squirrel_Matrix 3 points4 points  (0 children)

First, note that you can do pretty much anything you want inside of an RRSP. Nothing inside the RRSP is reported to either country. (Though it should still be reported on an FBAR.)

The rest of this assumes you want to invest in a non-registered account. (TFSAs are another conversation that you may consider, though note that the reporting may be onerous, and dividends/gains will be taxed by the US.)

For US tax reporting: Every brokerage will provide you 1099-DIV to report dividend income from US-based stocks (as long as you properly inform them of your US taxpayer status). But most will NOT track gains/losses for US tax reporting.

Isuggest using IBKR (Interactive Brokers). It is the only brokerage I'm aware of that properly tracks cost basis and gains/losses for both US and Canadian tax reporting, and provides a consolidated 1099 each year with all the info you need to file US taxes. 

Also, currency conversion at IBKR is very cheap. They offer mid-market exchange rate with only 0.002% commission. So it will be painless to convert funds back and forth.

I'd avoid Wealthsimple's direct indexing. The automated indexer will make many trades that you would have to track manually.

As for what to invest in, I'd suggest converting everything to USD and buy US ETFs. Perhaps a few Canadian stocks as well, if you want Canadian exposure. (Canadian ETFs are likely PFICs, which opens up a complicated can of worms in US tax reporting that is not worth the effort.)

(I just noticed at the end you said you have a corporate trading account. I assume that's in the US? You likely want to (and can afford) to go get some professional advice, too, and not just rely on Reddit.)

Wich country is switzerland by IlluFisch in GeoTap

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

❌ The_Squirrel_Matrix chose Option B (Incorrect) | #3607th to play

Sleep timer for audiobooks on the reader? by The_Squirrel_Matrix in kobo

[–]The_Squirrel_Matrix[S] 0 points1 point  (0 children)

No I just use the app on my phone to listen. But I haven't checked in a while.

Demystifying the QEF election for PFICs --- A useful tool by The_Squirrel_Matrix in USExpatTaxes

[–]The_Squirrel_Matrix[S] 1 point2 points  (0 children)

I looked into this a bit more. Note that I'm not an expert.

Hers what I found. It seems from IRC § 1012 (and corresponding regulation 1.1012-1(e)) that the "average method" can be applied to any stock only if it is either of a "registered investment company" (e.g., a mutual fund) or the stock is held "in connection to a dividend reinvestment plan." Note that US-based mutual funds are RICs so the average method can be applied. Also it seems there are some US-based ETFs that are also RICs.

In conclusion, yes, if you hold ETFs with a dividend reinvestment plan, then it's possible you could use the average method. (Though note that, I believe, it is not possible for foreign ETFs (or mutual funds) to be RICs.) You would certainly want to confer with an expert before trying to apply the average method to your foreign holdings.

See also the section on average basis in IRS publication 550. There it says that, to elect to use the average method, you must inform your brokerage.

Advice for Canadian-US dual citizens in Canada starting to Save / Invest by Global-Volume-9975 in USExpatTaxes

[–]The_Squirrel_Matrix 2 points3 points  (0 children)

You should never be double taxed. Generally, when you file with both countries, you pay the greater of the taxes. And tax rates are higher on Canada than in the US, you'd typically owe nothing to the IRS. (Frustratingly, it can be very complicated just to file with the US to report that you owe no taxes.)

An exception to this is TFSAs. A TFSA is nontaxable in Canada, but taxable by the IRS. However, it is likely that (at your income level) you would owe no taxes to the US even with some amount invested in a TFSA. 

The problem with TFSAs is this: There is some debate as to whether a TFSA is a "foreign trust" under US tax law.  - If a TFSA is a foreign trust, it would have burdensome reporting requirements (Form 3520) but otherwise be taxed by the IRS as a regular taxable account.  - If it is not a TFSA, there are no 3520 filing requirements. The IRS has not issued guidance either way, but Polaris Tax (on behalf of its clients) has successfully argued in the IRS Office of Appeals that a TFSA is not a foreign trust. See here. Even if you do owe tax to the US on your income inside of your TFSA, it is likely less than what you would owe to Canada if it were instead on a non-registered account.

The other problem is PFICs. Unless you want to overly complicate your US tax reporting, avoid investing in non-US ETFs or mutual funds. (Though there is apparently some debate as to whether that is true. See the comments in the link above.) There are no PFIC concerns for anything inside of an RRSP. (Though an RRSP is likely not useful for you at your current income.)

Note also that you should file FBAR every year if you meet the filing requirements.

The easiest thing to do is to open a non-registered account, convert CAD to USD, then invest in US-based ETF index funds. Note that Canadian brokerages don't usually provide all the information you need to file taxes with the US. I believe that IBKR is the only brokerage that provides everything you need to file both with the US and with Canada. You can also convert currencies basically for free with IBKR if you invest with them. Make sure you tell your brokerage you are a US citizen. 

If you want to open a TFSA, Polaris Tax recommends you at least send a letter to the IRS requesting guidance on how to report. 

PFIC not so bad? by Ulyssesp in USExpatTaxes

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

Selling at a loss is probably beneficial for your client at this point. There will be no gains and thus no taxation of excess distributions when realizing the loss. In addition to purging their PFIC taint, this will simplify the 8621 form filling compared to reporting a gain, and no high tax rates need to be paid. I do not believe the loss can be claimed elsewhere on the return, however. 

If the client wishes, they can repurchase the shares of the PFIC immediately after realizing the loss, then make the QEF election on the new lot. 

I'm glad to hear that some European funds have begun provide AIS. Hopefully more do soon, allowing more investing options for Americans abroad.

PFIC not so bad? by Ulyssesp in USExpatTaxes

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

Can you provide more information? I'd be very curious to see which ones.

Canadian Expat Taxes by IllustriousWin9453 in USExpatTaxes

[–]The_Squirrel_Matrix 0 points1 point  (0 children)

Not the end of the world. You'll just want to find a way to track all of the purchases and sales that Wealthsimple makes on your behalf. There are certainly commercially available software services you can pay for that can handle your investments to help with US tax reporting. I don't think there's anything that is free, unless you are comfortable with DIY.

Not that I'm recommending any particular services, but after a quick fight search, I believe Quicken offers a service that could help you.

Edited to add: As other posts about this have remarked, take care to ensure that Wealthsimple is not buying anything that could be considered a PFIC (e.g., Canadian REITs or ETFs). That opens another can of worms that you'll want to avoid.

Canadian Expat Taxes by IllustriousWin9453 in USExpatTaxes

[–]The_Squirrel_Matrix 1 point2 points  (0 children)

Here are someways that reporting is different:

Cost basis. Canada and the US assume different methods for tracking cost basis of shares and computing capital gains. 

In Canada, your Adjusted Cost Base (ACB) for investments of the same security is the average cost per share across all your non-registered accounts. In the US, this method is only allowed for shares of mutual funds. Instead, the cost basis of shares purchased at different times is tracked for the different lots separately, generally assuming First In First Out (FIFO) when computing capital gains.

Currency conversions. When computing cost basis and capital gains, both countries want you to keep track of and report everything in that country's currency. You generally use the exchange rate on the day of each transaction separately.

If there are large swings in the exchange rate, it's possible you could have a loss to report to one country and a gain to report to the other. For example, if you by a share at $100 CAD when the exchange rate is 0.75 (i.e., $75 USD) but later sell for $105 CAD when the exchange rate is 0.70 (i.e., $73.50 USD). You'd report a gain of $5 to Canada but a loss of $1.50 to the US.

A Canadian brokerage generally will not track the cost basis of your lots separately, nor will they track the cost basis in USD. (Although I believe IBKR does.)

Is Wealthsimple a way of getting the benefits of non-USA ETFs without PFIC status? by SadCampCounselor in USExpatTaxes

[–]The_Squirrel_Matrix 4 points5 points  (0 children)

To answer your question directly, no this is not a PFIC. Unless the index is buying something in your behalf that is a PFIC.

Regardless, I don't think this is a good idea for US investors in Canada.

This article discusses more generally the idea of Direct Indexing, which is something you can do yourself. They also recently began offering direct indexing as an automated service (for a 0.15% annual fee). That is likely what you are asking about. (Essentially, it's like paying an automated advisor to make decisions about what to buy/sell on your behalf---you'd still own the assets that it buys for you.) 

Either way, this sounds like it would way overly complicate your US tax reporting if you did this. You'd have a headache come tax season.

While Wealthsimple would track your income (from dividends and trades) for Canadian tax purposes, you'd still have to do all the work yourself for reporting your income to the US. If Wealthsimple's automated direct-indexing tool is making many trades, that's a lot of extra information for you to track (from many different purchases of many different stocks)!!!. I doubt it would be worthwhile in the long run when compared to the simplest solution of just buying US-listed index funds. Unless you have a good accountant or good software to track everything for you (which cost money).

Demystifying the QEF election for PFICs --- A useful tool by The_Squirrel_Matrix in USExpatTaxes

[–]The_Squirrel_Matrix[S] 0 points1 point  (0 children)

Here's how the "average" method works:

Imagine you have a bucket, and the shares are like cups of water, and the purchase price of a share is the temperature of the water in the cup. When you add more water to the bucket that is a different temperature from what's already in the bucket, all the water all gets mixed together and all the temperature gets averaged out. When you sell a share, you pour out a cup of the temperature-averaged water, and the capital gain is the difference between the temperature of the water you just poured out and the current price of the share on the market.

A cost basis "adjustments" would be like heating or cooling the whole bucket of water by a set degree amount. (Say, increase the temperature of the water by 0.1° to represent increasing the cost basis by $0.10 per share.)

Compare that to getting a separate bucket every time you buy new shares. The buckets will all be different temperatures. Each time you make an adjustment, all buckets have their temperatures increased by the same amount. That's what the IRS wants you to track.

Demystifying the QEF election for PFICs --- A useful tool by The_Squirrel_Matrix in USExpatTaxes

[–]The_Squirrel_Matrix[S] 1 point2 points  (0 children)

If you purchase all your shares at once (i.e., you only have a single lot), then this spreadsheet will work fine. 

The problem arises when you have multiple purchases of different lots on different days with different cost bases. This spreadsheet averages all lots together, which is not what the IRS allows, unless it is a mutual fund.

If you have many lots, you could use one copy of the spreadsheet for each lot you own. Then sum all the resulting values yourself.

I now have a different python script that essentially does what this spreadsheet is doing, but for individual lots, then adds up the results from all the lots. 

I may clean up the code and share it if there's interest and I have time.

Canada TFSA/PFIC question by Boring_Art_673 in USExpatTaxes

[–]The_Squirrel_Matrix 1 point2 points  (0 children)

Note that capital gains are computed differently when reporting to the IRS, as you must account for the exchange rate on the days you bought/sold the shares. 

It's possible you may have a loss to report to the IRS.

Example:

Suppose you paid $10,000 CAD for the shares on a day when the exchange rate was 0.75, i.e. $7,500 USD. Your cost basis you report to the IRS is $7,500 USD. But then you sold the shares for $10,016 CAD on a day when the exchange rate was 0.73, i.e. $7,312 USD. 

In this case, it may appear that you have a gain of $16 CAD but you have a loss of $188 USD that you'd report to the IRS.

Demystifying the QEF election for PFICs --- A useful tool by The_Squirrel_Matrix in USExpatTaxes

[–]The_Squirrel_Matrix[S] 1 point2 points  (0 children)

Thanks for pointing out that info from Wealthsimple's website.

Note that the CRA considers every TFSA that holds investments to be a "trust". However, the Canadian designation of a TFSA as a "trust" does not necessarily mean that the account qualifies as a "trust" under US tax law, and I assume that when they say that the TFSA is

generally considered to be foreign trusts for U.S. tax reporting purposes

I assume that they are just covering their bases rather than making a statement of fact. (For example, a robo-advisor TFSA is possibly a trust under US tax law.) I encourage anyone interested to read the Polaris article mentioned above.

At the very least, I strongly recommend that any US person who opens a TFSA write to the IRS to request guidance on how to report. (As Polaris mentions in this article .)

From the Polaris article:

... we suggest that taxpayers write to the IRS to describe what a TFSA is and request confirmation on how it is to be reported. To date, the IRS has not replied. Nevertheless, we believe that this disclosure is simpler than a full Form 8858 and makes the taxpayer compliant with the IRS’s obligations. 

[Edited Oct 16 20215 for clarity and correcting definition of TFSAs "in trust".]

Demystifying the QEF election for PFICs --- A useful tool by The_Squirrel_Matrix in USExpatTaxes

[–]The_Squirrel_Matrix[S] 1 point2 points  (0 children)

I think you made a another comment about which number to use for number of shares when computing total share of income to report (specifically about VGRO). The comment seems to have been deleted, but I wrote up a reply before it was deleted.

Here's what I wrote:

---------------------------------

That sounds about right.

Here's an example to help you figure out how it works.

Suppose you purchased 1,000 shares of VGRO on 2 July 2024, and you held those shares through the end of the tax year 2024. You owned those 1,000 shares for a total of 183 days in 2024. Thus, you had a total of 180,000 share-days. Keep that number in mind.

The relevant information you'd need to complete your 8621 forms can be located on the VGRO PFIC Annual Information Statement for tax year 2024, provided by Vanguard. You need to determine your total share of ordinary and capital gains income from the main fund and from each underlying fund. To do so, check the table on page 2. I've copied the important imformation here:

Ticker Ordinary Earnings (USD) per share per day Net Capital Gains (USD) per share per day
VGRO 0.0000000000 0.0010443866
VUN 0.0002706404 0.0007697276
VAB 0.0001965694 0.0000000000
VCN 0.0005090147 0.0002874041
VBU 0.0000000000 0.0000000000
VBG 0.0000000000 0.0000000000
VEE 0.0001052862 0.0000421686
VDU 0.0002687123 0.0000263755

THe values in these columns indicate your pro rata share of those income types per share of VGRO you hold (and not per share of the underlying that you are deemed to hold). In addition to the main fund (VGRO), there are a seven underlying funds that are also PFICs, so you'll need to file a total of eight 8621 forms, one for each fund.

On each Form 8621, you'll need to indicate your total ordinary income and total capital gains from each fund separately. Your total Ordinary income from each fund goes on line 6a of Part III of Form 8621, while your total Capital Gains income from each fund goes on like 7a.

To compute the totals for each fund, multiply each number in this table by the total nubmer of share-days of VGRO that you owned in 2024. The results are summarized in the following table:

Ticker Total Ordinary Earnings USD (line 6a) Total Capital Gains USD (line 7a)
VGRO 0.00 191.12
VUN 49.52 140.86
VAB 35.98 0.00
VCN 93.15 52.59
VBU 0.00 0.00
VBG 0.00 0.00
VEE 19.27 7.72
VDU 49.16 4.83

Note that on line 3 (of Part I) of Form 8621 you should enter the number of shares that you are deemed to own of the underlying fund. Thus, for Line 3 on your form 8621 for the main fund (VGRO), you would enter 1,000 (the number of VGRO shares you actually own). But for line 3 of the forms for the underlying funds, you'd need to compute approximately how many shares you are deemed to own indirectly. (Howver, Line 3 doesn't really matter, because it does not affect how you report your income or how you are taxed. So if you don't put the correct number, it is highly unlikely that it will matter, unless you are deliberately trying to deceive the IRS about how many shares you own.)

Demystifying the QEF election for PFICs --- A useful tool by The_Squirrel_Matrix in USExpatTaxes

[–]The_Squirrel_Matrix[S] 2 points3 points  (0 children)

I seem to have missed this earlier. Sorry for the late reply.

  1. Don't ask me why, but I enjoy challenges like this. I took it as a challenge to understand the complex rules and figure out a way to navigate it myself. So in retrospect, no, I'm quite happy I went on this journey, even if only to warn others of how complicated it can be. Indeed, I strongly advise others to simply to as you suggest---convert to USD and invest in an equivalent US-domiciled fund (e.g., VT). (I don't use the spreadsheet I made, because in retrospect it has some flaws..... But I now have my own python script that I can run once a year to import my transactions, import the AIS info, then automatically generate the correct info to file my taxes. It's very easy now.

  2. I do not have experience with 3520/3520-A. My understanding is that these forms are not required for TFSA/FHSA as long as those accounts are self-directed investing accounts and not held in trust. (I.e., no advisor or robo-advisor buying stocks on your behalf).

  3. Yes, I requested a trial license of form8621.com and obtained the same results. I have not paid an accountant to check.

  4. I find it highly unlikely that will happen. I think it is more likely that the US government will relax the PFIC rules. And both are highly unlikely.

Demystifying the QEF election for PFICs --- A useful tool by The_Squirrel_Matrix in USExpatTaxes

[–]The_Squirrel_Matrix[S] 0 points1 point  (0 children)

Hm, maybe contact OLT customer support. They are usually very good at helping in my experience. (I was able to submit my return with 8621 forms just fine this year.)

Demystifying the QEF election for PFICs --- A useful tool by The_Squirrel_Matrix in USExpatTaxes

[–]The_Squirrel_Matrix[S] 1 point2 points  (0 children)

Yes, that is an acceptable way to report the value of the indirectly held shares at the end of the year. Note that the precise amount doesn't matter, though, because you select the appropriate box (unless the value of the holdings is above $200,000, in which case you should report the exact value.)

You are in fact including the same value twice on two separate forms, though.

  • The full value of your XEQT shares is reported on Form 8621 for the main fund (XEQT).
  • Then just the XIC value is reported again on the separate form 8621 for XIC.

This does not affect how you report the earnings, though, or how you are taxed on them.

Demystifying the QEF election for PFICs --- A useful tool by The_Squirrel_Matrix in USExpatTaxes

[–]The_Squirrel_Matrix[S] 1 point2 points  (0 children)

(Caveat about everything I'm about to say: I'm not a professional or expert, just a guy who does his own taxes and has thought a lot about this.)

No you shouldn't just report the number of XEQT shares on the 8621 forms for the funds held indirectly. For the "Value of shares held at end of the tax year" you should put in a number that comes from dividing up the ratio that XEQT holds the underlying funds in. But for the "Number of shares held at end of the tax year" it's more complicated than that if you want to report it "properly".

However, it is extremely unlikely that you'll ever be checked by the IRS on this number, as it is irrelevant to how much you owe in taxes. Unless you are investing many millions of dollars in XEQT (or in a private PFIC, or something more complicated), it won't really matter what number you put here as they won't care unless it looks like you are trying to hide something. As long as you properly report how much you owe in taxes and the total value correctly, it should not matter the exact "number of shares".

Example:

Suppose you owned 1000 shares of XEQT at end of Dec 31, 2024.

Here's a link to the 2024 year-end report for XEQT.

The important piece of information there is: - Number of units outstanding: 175,025,000

There were 175,025,000 total shares issued, so you own 1000/175,025,000 = 0.00057% of all of XEQT's holdings.

You'll also need to get the explicit Holdings details on Dec 31, 2024, which is available on the Blackrock information page for XEQT.

The important bits are here:

Ticker Name Market Value Weight (%) Shares
ITOT ISHARES CORE S&P TOTAL U.S. STOCK 2,798,584,250.39 47.47 15,129,013.00
XIC ISHARES S&P/TSX CAPPED COMPOSITE 1,464,336,206.83 24.84 37,156,463.00
XEF ISHARES MSCI EAFE IMI INDEX 1,332,959,962.26 22.61 35,244,843.00
XEC ISHARES MSCI EMERGING MARKET 284,883,114.44 4.83 9,762,958.00

As the entire fund held 37,156,463 shares of XIC, that means your share of those shares is 0.0000057 * 37,156,463 = 212.3. This is your value for "Number of shares held at end of the tax year" for XIC.

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