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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