United States citizens, Green Card holders, and residents (particularly those with Canadian ties) have likely heard the term ‘Passive Foreign Investment Company’ (PFIC) in recent years. For those of you who are unfamiliar with the term, a PFIC is (in the eyes of the IRS) any foreign (non-U.S.) corporation that meets a passive asset or a passive income test. Specifically, a foreign corporation is deemed to be a PFIC if 75% or more of its gross income is from passive sources; or if 50% or more of its assets could be used to produce passive income.
What does this mean for the average investor? Well, it is of particular concern to taxpayers with U.S. reporting obligations such as U.S. citizens living in Canada, U.S. Green Card holders living in Canada, and/or foreign nationals temporarily residing in the United States. Such individuals should be aware of PFICs and their potential tax consequences.