Taxation on foreign stock

Let’s just say a U.S. citizen who is plans on sending $10,000 to a brokerage firm in Canada to invest in Junior mining stocks. The question arises as to what kind of corporation he should form in order to minimize capital gains taxes from stocks and to protect his privacy as well?

U.S. investors in foreign securities should first consider both the U.S. tax treatment and the tax laws of the foreign country (if they have any). As far as can be determined, Canada imposes a tax on capital gainsrealized by foreign investors. The U.S. tax treatment of foreign company stocks is basically the
same as for U.S. stocks; if the stocks are held directly by the taxpayer or through a ‘pass-through’ entity. (Pass-through entities, by the way, include a partnership, S corporation or a U.S. grantor trust.)


Therefore, if a tax is imposed by Canada, the U.S. will allow the taxpayer to claim a foreign tax credit to the extent of the U.S. tax on the income subject to tax in Canada.

But, if a U.S. taxpayer forms a foreign corporation, using that corporation to invest in securities, the U.S. will treat that entity as a passive foreign investment company (PFIC) and as a controlled
foreign corporation (CFC). The U.S. tax treatment of these entities is generally not beneficial.

More information regarding PFICs is available can be found at http://www.offshorepress.com/offshoretax/otpfic.html. Other information about the tax treatment of a CFC is available at http://www.offshorepress.com/offshoretax/otcorp.html.

In some cases, a foreign corporation or international business company (IBC) owned by a U.S. citizen can elect to be treated as a pass-through entity. The election can be made with tax form 8832. If the foreign corporation is owned entirely by one U.S. citizen or entity, it can elect to be treated as a disregarded entity. The income of a disregarded entity would then report on the form 1040 of an individual or on form 1120 for a corporation.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.


 

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