A common tax deferral strategy for high net-worth Canadians usually involves having various investments owned through a holding company. While this structure works well for Canadian tax residents, retaining funds in a Canadian holding company once a snowbird moves stateside may not be the best course of action.
The IRS treats US residents who are shareholders of foreign companies which earn passive income in a punitive manner. The IRS may view a Canadian holding company as either a “Controlled Foreign Corporation” (“CFC”) or a “Passive Foreign Investment Company” (“PFIC”); snowbirds with PFICs or CFCs must comply with IRS tax filing obligations, and they may be taxed at an egregious rate on income earned in their PFICs and CFCs. As a result, snowbirds who move to the US and continue to earn income from their Canadian holding companies often find themselves caught in a cross-border tax trap.
The impact of the CFC and PFIC rules can be minimized or eliminated. For example, prior to moving, a snowbird may consider creating a structure that is more tax-efficient than a Canadian holding company in which they can continue to hold funds as a US tax resident.