SALE OF CANADIAN MUTUAL FUND CONSIDERED SALE OF PASSIVE FOREIGN INVESTMENT COMPANY (PFIC):

If you are a U.S. Citizen, Green Card Holder, or Other U.S. Resident and you sell a Canadian or other non-U.S. mutual fund, you may have to comply with special tax rules applying to Passive Foreign Investment Companies (PFIC’s). Many non-U.S. corporate mutual funds may be PFIC’s.

If you own shares in a PFIC and you sell them for a profit you generally must pro-rate your profit over all the years you held the shares in the PFIC, pay U.S. income tax on the profit allocated to each year at the highest U.S. rate in effect for that year, and pay interest on all the prior year’s tax, computed from the tax return due date for the year to which the income is attributable.

The above rule may not apply if you elect to treat your investment as a "Qualified Electing Fund" (QEF). This election is made by attaching Form 8621 to the annual tax return. This will permit the annual inclusion of the QEF your pro-rata share of ordinary income and long term capital gains.

New regulations on Foreign owned property:
The new Foreign Reporting Requirements require that an annual report be filed with your current tax return by April 30^th of each year. This is effective with tax years beginning January 1, 1996. The first reports for 1996 and 1997 are due April 30, 1998. These will be for the tax filings for the years ended December 31, 1996 and December 31, 1997. There are certain questions that need be answered on the 1997 return which will prompt Revenue Canada to look for a report on your Foreign owned property.

This reporting affects any taxpayer or partnership, resident in Canada, with a total investment cost value in excess of $100,000 (Can$$) at any time during the year.

This includes: any foreign owned property, including cash, tangible property, real estate property and/or shares of a foreign corporation (such as IBM or GMC).

Exclusions to the above reporting would property used exclusively in an active business; personal use property such as a car, boat or house (not rental property); property in RRSP’S, RRIF’S and registered pension plans.

The above $100,000 total value does not apply to any investment in: A) shares of a foreign trust or foreign affiliates; B) property transferred or loaned to a foreign trust or foreign affiliate; and C) amounts received as distributions from; or are indebted to, foreign trusts in which the taxpayer is beneficially interested.

The first filing deadline is April 30, 1998. The penalty for failure to file these information returns on time is $25 per day for 100 days ($2,500 maximum). Where failure to file is done knowingly or under circumstance amounting to gross negligence the penalty will be $500 per month up to a maximum of 24 months for a total of $12,000.

Because of the above onerous penalties, it is suggested that every Canadian resident review their foreign holdings.