# Private Equity taxation as a non-resident living in the US?



## pecanuck (Sep 26, 2016)

I am a Canadian citizen currently living in the US. Currently registered as a non-resident for Canadian income tax purposes.

I am considering investing some money into an acquisition deal run by a Canadian private equity company which my friend works in. The way it's structured is that I would be investing in a particular Canadian portfolio company through the private equity firm, as opposed to being invested in a general fund run by the private equity. Not sure if the way it's set up matters for tax purposes. The portfolio company does not deal with real estate.

Would my tax obligations be equivalent to the purchase of Canadian equity securities, namely taxes on capital gains and a reduced withholding tax on dividends? Or would it be substantially different? Also, are there any particular forms I need to be aware of?


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## Market Lost (Jul 27, 2016)

Are you an accredited investor?


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## pecanuck (Sep 26, 2016)

No, but there is a decent chance I will be in 1 or 2 years. Does this have a large impact?


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## pecanuck (Sep 26, 2016)

pecanuck said:


> No, but there is a decent chance I will be in 1 or 2 years. Does this have a large impact?


Correction: I will be as of this tax year.


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## Market Lost (Jul 27, 2016)

pecanuck said:


> No, but there is a decent chance I will be in 1 or 2 years. Does this have a large impact?


Unless there is some twist on this, PE is normally only for accredited investors. There is no impact on taxes, but it means that you can be taken for a ride a lot easier because they don't have to provide a prospectus, and the onus is on you to do your own due diligence. As for taxation, you really have to know how this sort of vehicle is structured because you can get a real mixed basket of companies, and who the heck knows what's in it? Could even be a RVC/LSIF, which is usually your cue to exit stage left, quick.Then you also have to deal with US taxation, and that can get real fun.


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## pecanuck (Sep 26, 2016)

Market Lost said:


> Unless there is some twist on this, PE is normally only for accredited investors. There is no impact on taxes, but it means that you can be taken for a ride a lot easier because they don't have to provide a prospectus, and the onus is on you to do your own due diligence. As for taxation, you really have to know how this sort of vehicle is structured because you can get a real mixed basket of companies, and who the heck knows what's in it? Could even be a RVC/LSIF, which is usually your cue to exit stage left, quick.Then you also have to deal with US taxation, and that can get real fun.


So I take it that from a Canadian tax standpoint it's treated as any other capital gains tax. One thing I'll need to double check is if it counts as a taxable Canadian property, which I don't think is the case. It is not a RVC/LSIF, as this is an investment into just 1 company (I have yet to receive the docs, but I'm just trying to get a hold of the tax landscape early). You mention US taxation - what are some of the usual pitfalls?

Last but not least, really appreciate your input.


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## Nerd Investor (Nov 3, 2015)

The real headaches with this will probably be on the US taxation side. I'd read up on PFICs (Passive Foreign Investment Companies).


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## Market Lost (Jul 27, 2016)

pecanuck said:


> So I take it that from a Canadian tax standpoint it's treated as any other capital gains tax. One thing I'll need to double check is if it counts as a taxable Canadian property, which I don't think is the case. It is not a RVC/LSIF, as this is an investment into just 1 company (I have yet to receive the docs, but I'm just trying to get a hold of the tax landscape early). You mention US taxation - what are some of the usual pitfalls?
> 
> Last but not least, really appreciate your input.


Not sure if it's just normal capital gains or not. It would depend on how it is structured, if it is just a plain vanilla stock purchase, then that would be true, but you need to find that out before you buy. As for the US side, I'm not qualified in any way to comment on it, there tax code could fill a semi truck, and I don't even pretend to know past a few basics. Fun fact Donald Trump's tax return is reported to be over 12K pages long.


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## Eclectic12 (Oct 20, 2010)

pecanuck said:


> So I take it that from a Canadian tax standpoint it's treated as any other capital gains tax ...


Since you say you are not a Canadian tax resident, it would seem the question is whether it would be Part XIII or Part I tax, as the PE company is Canadian.
http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/nnrs-eng.html




pecanuck said:


> ... You mention US taxation - what are some of the usual pitfalls?


The typical pitfalls are that people don't realise that as short as three 121 day stays in the US likely means filing a US tax return. From what I've read, this means reporting one's worldwide income as well as Foreign Bank Account reporting (where one is over the threshold) and a complicated tax return.

The key question is that since you have cut ties with Canada - what justification *are* you a tax resident of. If it is the US, then you will have to figure what US tax rules are for ownership of this PE investment.


Cheers


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## pecanuck (Sep 26, 2016)

Nerd Investor said:


> The real headaches with this will probably be on the US taxation side. I'd read up on PFICs (Passive Foreign Investment Companies).





Market Lost said:


> Not sure if it's just normal capital gains or not. It would depend on how it is structured, if it is just a plain vanilla stock purchase, then that would be true, but you need to find that out before you buy. As for the US side, I'm not qualified in any way to comment on it, there tax code could fill a semi truck, and I don't even pretend to know past a few basics. Fun fact Donald Trump's tax return is reported to be over 12K pages long.


The way it's structured is that I'll be purchasing convertible preferred shares in a dedicated holding company, which holds preferred shares in the portfolio company(target co). The private equity holds common stock in the holding co. 

For major distributions I can exercise the convertibility of my preferred shares into common and sell that. For smaller ones, the preferred nature gives me seniority on the payouts.

On the Canadian side of things, I don't really see it tripping up any special tax rules other than capital gains (again, with my limited tax knowledge). Both the private equity and target holding have nothing to do with real estate.

On the US side of things, I'm not sure if it qualifies as PFIC, which would be a real pain. According to the IRS, a non-US corporation is considered a PFIC if it meets either of the following tests:

1) Income test - 75% or more of foreign co's gross income is passive income
2) Asset test - 50% or more of foreign co's average assets produce, or could produce passive income, or are assets (such as cash and bare land) that produce no income. 

Given that the foreign co = holding co in my case, holding co's assets are shares in another company, and holding co is actively involved with target co's business (easily meets the >500 hrs participation), I'm crossing my fingers that it's not a PFIC.


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## Eclectic12 (Oct 20, 2010)

^^^

Crossing your fingers could be a labour intensive, if not expensive choice.

I haven't delved into the details but a Canadian MF company holding US stock seems similar to the "holding co" scenario. According to Fidelity:


> 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.


https://www.fidelity.ca/cs/Satellite/en/public/products/regulatory_documents/pfic


From your description of holding shares, this sounds like it would it would fit the "passive income" criteria.


Cheers


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