Tax efficiency is key
Taxes play a crucial role in long-term wealth compounding. Many of our funds are based on a tax-efficient corporate class structure which results in all distributions being characterized as either Canadian eligible dividends, capital gains and/or return of capital for tax purposes.View Tax Factors
Frequently Asked Questions
Are you a U.S. citizen?
Passive Foreign Investment Company (PFIC)
While putting our clients first, we recognize the concern among investors about the US Passive Foreign Investment Company rules and have taken an active position in the investment industry by making all Purpose funds available to Canadian investors who are classified as “US persons” under US tax law. Purpose provides PFIC Annual Information Statements for all of our investment funds on an annual basis prior to the April US tax reporting deadline for individuals.
PFIC Annual Information Statement:
This statement is provided for Shareholders who are United States persons for purposes of the U.S. Internal Revenue Code of 1986, as amended (“IRC”) and the regulations thereunder. It is not relevant to other shareholders. TO ENSURE COMPLIANCE WITH TREASURY DEPARTMENT CIRCULAR 230, YOU ARE HEREBY NOTIFIED THAT ANYTHING CONTAINED IN THIS NOTICE CONCERNING ANY FEDERAL TAX OR OTHER ISSUE IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. The PFIC Annual Information Statement is being provided pursuant to the requirements of Treasury Regulation Section 1.1295-1(g) (1). The PFIC Annual Information Statement contains information to enable you, should you so choose based on the advice of your tax advisors in light of your personal tax circumstances, to elect to treat the Fund as a qualified electing fund (“QEF”). A U.S. shareholder who makes a QEF election is required to annually include in his or her income his or her pro rata share of the ordinary earnings and net capital gains of the Fund, whether or not that entity distributes any amounts to its shareholders. If you do not elect to treat the Fund as a QEF, then if the Fund is a PFIC for any year during your holding period, adverse tax consequences could result. The QEF election is generally made on Form 8621 (“Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund”) on or before the due date, including extensions, for the income tax return with respect to the tax year to which the election relates. THE INFORMATION IS PROVIDED IN ORDER TO ASSIST SHAREHOLDERS IN MAKING CALCULATIONS AND DOES NOT CONSTITUTE TAX ADVICE. THE U.S. TAX LAWS REGARDING PFICS ARE EXTREMELY COMPLEX AND SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE OVERALL TAX CONSEQUENCES OF THE OWNERSHIP OF UNITS ARISING IN THEIR OWN PARTICULAR SITUATIONS UNDER UNITED STATES FEDERAL, STATE, LOCAL OR FOREIGN LAW.
Who are US persons?
The definition of a U.S. person is broad and generally includes U.S. residents, U.S. citizens, U.S. green card holders, other persons with a substantial connection to the U.S (such as being born in the U.S. or being born to U.S. citizen parents), and certain entities organized in the U.S. It should be noted that U.S. citizens and green card holders are considered U.S. persons regardless of their country of residence.
What is a PFIC?
Any foreign corporation (non-U.S.) meeting either the income test or the asset test is considered a PFIC. PFIC status does not, itself, have any impact on the non-U.S. corporation or non-U.S. shareholders.
1. The Income Test is met if 75% or more of the corporation’s gross income consists of passive income, and 2. The Asset Test is met if 50% or more of the corporation’s average assets consist of assets that produce passive or could produce passive income, or are assets (such as cash and bare land) that produce no income.
Passive income includes, among other things, dividends, interest, rent, royalties and capital gains from the disposition of securities. Special U.S. tax rules apply to U.S. persons who own PFICs. These rules have existed since 1986 and were enacted as part of the Tax Reform Act of 1986 as a way of placing owners of offshore investment funds on a similar footing to owners of U.S. investment funds.
In 2010, the Internal Revenue Service (IRS) issued a clarification that Canadian mutual funds are classified as corporations for U.S. tax purposes and, as such, are subject to the PFIC rules. In addition, new reporting requirements associated with PFIC rules were recently announced and are expected to come into force in the near future.
How do the PFIC rules work?
U.S. persons who own PFICs must report annually each PFIC investment on a separate IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund). An investor or advisor can follow this link to the IRS website for more information on Form 8621 click here.
1. Market-to-Market Election - A shareholder of a PFIC may elect each year to recognize gain or loss on the shares as if they had sold the PFIC shares at fair market value. Under the Mark-to-Market election, investors must, on an annual basis, Report all distributions (interest, dividends, capital gains, etc.) as ordinary income; and Recognize all increases/decreases to the value of the fund as a gain/loss on their holdings as if the fund was sold at the end of each year.
2. Qualified Electing Fund (QEF) Election - Each U.S. person owning shares of a PFIC may elect to include their pro-rata share of the ordinary income and net capital gains of the PFIC (that same treatment as a shareholder of a U.S. investment fund must do), Please note that T3 and T5 slips issued by Canadian mutual funds are for Canadian tax purposes only and do not contain sufficient information to support a QEF election.
MTM or QEF - which is better?
Investors should consult with their financial advisor or a U.S. tax specialist to make this decision. Generally, the QEF election is preferred because it is more closely aligned with the tax treatment of mutual fund investments by both the U.S. and Canadian tax systems.
What are the consequences of not making a MTM or QEF election?
If the U.S. person does not file Form 8621 and does not make one of the two elections above, the following tax treatment would apply:
1. Any gains recognized on disposition of the PFIC shares and distributions received from a PFIC during the year greater than 125% of the average distributions received during the previous three years would be taxed as ordinary investment income during the year. 2. The amounts allocated to prior tax years will be subject to U.S. tax at the highest marginal rate and also subject to deemed interest charge.
How do these rules affect different types of accounts, such as non-registered accounts, TFSAs and RRSPs?
These rules are expected to affect investments in non-registered accounts, TFSAs and RESPs. The effect of these rules on PFICs held in retirement savings accounts such as RRSPs and RRIFs is currently unclear.
Purpose Investments recommends that all individuals or investment advisors speak with a qualified tax professional. This information should be used for informational purposes only and is not regarded as tax advice.