Which type of Canadian investments would not be PFIC?

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speer
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Which type of Canadian investments would not be PFIC?

Post by speer »

In basic terms PFIC falls under the following:

Canadian-Domiciled

1) ETF's
2) Mutual Funds

To invest CAD funds in Canada without PFIC restrictions I am restricted to individual stocks and bonds only, although it appears even individual stocks be fall under PFIC.

PFIC

...a non-U.S. corporation that has 75% or more of its gross income consisting of passive income or 50% or more of the average fair market value of its assets consisting of assets that produce passive income.

I generally have a difficult time actively applying the definition of PFIC, especially with whats considered passive since the term is so ambiguous.

I was seeking to invest in Canadian corporate bonds as well as steady dividend yielding stock such as Canadian utility companies.

1) Are individual stocks and bonds the only PFIC exempt "investments"?
2) Are virtually all Canadian-Domiciled ETF's PFIC? (IRS confirmed Mutual Funds are)
3) Can you give a layman's explanation on what stocks and/or bonds / other investments would be considered PFIC and to be avoided?
4) Would utility stocks fall under the PFIC definition?
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AltaRed
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Re: Which type of Canadian investments would not be PFIC?

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I believe all Cdn domiciled ETFs and mutual funds are PFICs, as are other 'trusts' such as REITs and income funds that issue T3 tax slips. The key issue as I would interpret it is business structure, i.e. trust structure versus corporation. I might be wrong on this - others with more knowledge may wish to comment.
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speer
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Re: Which type of Canadian investments would not be PFIC?

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What if I bought a bank stock such as Royal Bank of Canada? Wouldn't 75% of its gross income be passive since it generates money through loans?

What about telecom, grocery, utility, REIT's or insurance companies?

It becomes difficult to distinguish which would be considered PFIC.

For example, here is a list of some stocks I am looking at purchasing: https://www.stocktrades.ca/best-canadia ... ocks-2017/
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AltaRed
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Re: Which type of Canadian investments would not be PFIC?

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I've already mentioned my belief on which investments might be considered PFICs, i.e. those with a trust structure that distributes all income to its unitholders. Even that is extreme since we have many trusts such as AW.UN whose primary business is building, operating and/or franchising burger joints. Hardly passive.... You are way off base considering a utility or a bank as a PFIC. Even a REIT is an extreme case since a REIT's main business is developing and/or orperating real estate, not just collecting rent. But hey.... if you are that obsessed with interpretation, stay away from anything with a trust structure.
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twa2w
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Re: Which type of Canadian investments would not be PFIC?

Post by twa2w »

speer wrote: 02 Sep 2017 04:06 What if I bought a bank stock such as Royal Bank of Canada? Wouldn't 75% of its gross income be passive since it generates money through loans?

What about telecom, grocery, utility, REIT's or insurance companies?

It becomes difficult to distinguish which would be considered PFIC.

For example, here is a list of some stocks I am looking at purchasing: https://www.stocktrades.ca/best-canadia ... ocks-2017/
RBC income from loans is active business income as they are in the business of lending money and they have to actively lend, monitor and collect said loans and require a substantial number of emploees to do so. Similiarily, insurance compani es and utilities etc.

If you bought a canadian holding company equivelant of Berkshire Hathaway, you may be closer to the holding Co definition under PFIC. Ie perhaps Onex or Fairfax. Although one must distinguish between a conglomerate and a holding Co with strictly passive income.
Of the ones you linked, only H&R and Enbridge income trust might fall under the PFIC rule but I suspect they do not. Have not checked how they own their assets and where income is derived from.
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