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January 23, 2020 | Beware the PFIC Trap

Lobo Tiggre, aka Louis James, is the founder and CEO of Louis James LLC, and the principal analyst and editor of the Independent Speculator. He researched and recommended speculative opportunities in Casey Research publications from 2004 to 2018, writing under the name “Louis James.” While with Casey Research, he learned the ins and outs of resource speculation from the legendary speculator Doug Casey. Although frequently mistaken for one, Mr. Tiggre is not a professional geologist. However, his long tutelage under world-class geologists, writers, and investors resulted in an exceptional track record. The average of the yearly gains published for the flagship Casey publication, the International Speculator, was 18.5% per year during Tiggre’s time with the publication. A fully transparent, documented, and verifiable track record is a central feature of IndependentSpeculator.com services going forward. Another key feature is that Mr. Tiggre will put his own money into the speculations he writes about, so his readers will always know he has “skin in the game” with them

The US has a special tax treatment for what the IRS calls Passive Foreign Investment Companies (PFICs). Other countries may have similar rules, but this is the one I know about. This PFIC issue has snared many US investors who didn’t realize that the IRS may consider a Canadian mining stock to be a PFIC. Failure to file Form 8621 to disclose PFIC investments can cost you a bundle.

Before saying anything else, I want to stress that I am not a CPA nor any kind of tax expert; the bottom line is that investors should consult with tax professionals on this subject.

The idea of the PFIC rule is to prevent US taxpayers from avoiding higher income taxes under the guise of capital gains.

This applies to things like Canadian or other foreign mutual funds and pooled funds. Kitco pool accounts come to mind. Foreign exchange-traded funds (ETFs) and income trusts or real estate investment trusts (REITs) would also be covered. Canadian royalty companies like Wheaton Precious Metals (WPM) also seem like a natural target for the IRS.

But aggressive interpretation by an auditor could apply the rule to companies one might not see as passively generating income at all—like an exploration or mining company.

I remember hearing horror stories about this back in my Casey days. People often asked us for advice. How does one know if one might have a PFIC in one’s portfolio?

Of course, for liability reasons, we could only encourage readers to consult with a tax professional.

But my sense is also that the IRS application of this rule is somewhat random and arbitrary. It’s hard to be sure, even for seasoned investors.

That’s what makes the PFIC issue so dangerous. If it hasn’t come up for years, even in an audit, that doesn’t mean you’re safe from getting nailed in the future. After years of doing the same thing, you can suddenly be told you’ve failed to disclose PFIC income and fined for that failure. The penalties can be draconian.

And remember; just because you bought a stock on the US market doesn’t make the company a US company.

A Canadian (or other foreign company) whose stock you buy on US markets is still a foreign company and may be deemed a PFIC by the IRS.

Happily for me, my capital gains are governed by Puerto Rican law, not US federal law.

But resource investors—especially US investors who buy a lot of Canadian stocks—should be aware of this issue.

What to do?

I hate to sound like a broken record, but there’s really only one thing to do; consult with a tax professional. Ideally, he or she should have a lot of experience dealing with investments. I would not expect this of the typical H&R Block tax preparer.

Caveat emptor,

 

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January 23rd, 2020

Posted In: Louis James

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