Overview for U.S. Holders
Assuming that the Trust is a Passive Foreign Investment Corporation (PFIC), a U.S. Holder (as definied in the prospectus) will be required to file an annual report with the IRS reporting his, her or its investment in the Trust. Please see the IRS's 'Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund'.
Special U.S. federal income tax rules apply to a U.S. Holder that holds stock in a foreign corporation classified as a PFIC for U.S. federal income tax purposes. In general, the Trust will be treated as a PFIC with respect to a U.S. Holder if, for any taxable year in which such U.S. Holder held the units, either:
- at least 75% of the Trust's gross income for such taxable year consists of passive income; or
- at least 50% of the average value of the assets held by the Trust during such taxable year produce, or are held for the production of, passive income.
For purposes of these tests, ''passive income'' includes dividends, interest, and gains from the sale or exchange of investment property (including commodities). The income that the Trust derives from its sales of physical bullion is expected to be treated as passive income for this purpose. Since substantially all of the Trust's assets will consist of physical bullion and the Trust expects to derive substantially all of its income from the sales of physical bullion, it is expected the Trust will be treated as a PFIC for each of its taxable years.
Assuming the Trust is a PFIC, a U.S. Holder will be subject to different taxation rules depending on whether the U.S. Holder:
(1) makes an election to treat the Trust as a QEF, which is referred to as a QEF election,
(2) makes a mark-to-market election with respect to the units, or
(3) makes no election and therefore is subject to the Default PFIC Regime (as defined in the Prospectus).
As discussed in detail in the Prospectus, making a QEF election or a mark-to-market election generally will mitigate the otherwise adverse U.S. federal income tax consequences under the Default PFIC Regime. However, the mark-to-market election may not be as favorable as the QEF election because a U.S. Holder generally will recognize income each year attributable to any appreciation in the U.S. Holder's units without a corresponding distribution of cash or other property.
Within 45 days from the end of each taxable year of the Trust, the Trust Manager will provide or cause to be provided to unitholders all information necessary to enable unitholders or beneficial owners of units, as applicable, to elect to treat the Trust as a QEF, including a PFIC form on the Trust's website.
For more details, please see 'Material Tax Considerations' in the Prospectus, which can be downloaded here.
FAQs for U.S. taxable holders of units of Sprott Physical Gold Trust
The following discussion does not purport to deal with the tax consequences of owning units to all categories of investors, some of which, such as dealers in securities, regulated investment companies, tax-exempt organizations, investors whose functional currency is not the U.S. dollar and investors that own, actually or under applicable constructive ownership rules, 10% or more of the units, may be subject to special rules. This discussion does not address U.S. state or local tax, U.S. federal estate or gift tax or foreign tax consequences of the ownership and disposition of units. This discussion deals only with holders who purchase units in connection with this offering and hold the units as a capital asset. You are encouraged to consult your own tax advisors concerning the overall tax consequences arising in your own particular situation under U.S. federal, state, local or foreign law of the ownership of units.
Pursuant to U.S. Internal Revenue Service regulations, we hereby inform you that: (i) any tax advice contained herein is not intended and was not written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed on the taxpayer; (ii) any such advice was written to support the promotion or marketing of the units in Sprott Physical Gold Trust; and (iii) each taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
1. What are the tax consequences of selling my units on NYSE Arca or TSX?
Answer: That depends on which of the following three alternatives apply:
- you have made a timely and valid Qualified Election Fund, or QEF, election;
- you have made a mark-to-market election; or
- you have made no election and therefore are subject to the Default PFIC Regime (as defined below).
2. I have made a timely and valid QEF election. What are the tax consequences of selling my units on NYSE Arca or TSX?
Answer: Any gains realized on the sale of units by an investor that is an individual, trust or estate, including such investors that own units through partnerships and other pass-through entities for U.S. federal income tax purposes, may be taxable as long-term capital gains (at a maximum rate of 20% compared to a long-term capital gains tax rate of 28% applicable to the disposition of physical gold bullion and other "collectibles" held for more than one year), provided that such U.S. investor has held the units for more than one year at the time of the sale and such U.S. investor has made a timely and valid QEF election with respect to the units.
3. How do I make a timely QEF election?
Answer: A U.S. investor would make a QEF election with respect to any year that the Trust is a PFIC by filing IRS Form 8621 with his, her or its U.S. federal income tax return.
4. I have made a mark-to-market election. What are the tax consequences of selling my units on NYSE Arca or TSX?
Answer: If the mark-to-market election is made, the U.S. investor generally would include as ordinary income in each taxable year the excess, if any, of the fair market value of the units at the end of the taxable year over such U.S investor's adjusted tax basis in the units. The U.S. investor would also be permitted an ordinary loss in respect of the excess, if any, of the U.S. investor's adjusted tax basis in the units over their fair market value at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. Any income inclusion or loss under the preceding rules should be treated as gain or loss from the sale of units for purposes of determining the source of the income or loss. Accordingly, any such gain or loss generally should be treated as U.S.-source income or loss for U.S. foreign tax credit limitation purposes. A U.S. investor's tax basis in his, her or its units would be adjusted to reflect any such income or loss amount.
5. I have made neither a timely and valid QEF election nor a mark-to-market election. What are the tax consequences of selling my units on NYSE Arca or TSX?
Answer: If you have made neither a QEF election nor a mark-to-market election for a year, you generally will be subject to special rules, to which we will refer as the Default PFIC Regime, with respect to
- any excess distribution (i.e., the portion of any distributions received by you on the units in a taxable year in excess of 125% of the average annual distributions received by you in the three preceding taxable years, or, if shorter, your holding period for the units), and
- any gain realized on the sale, exchange, redemption or other disposition of the units.
Under the Default PFIC Regime:
- the excess distribution or gain would be allocated ratably over the non-electing holder's aggregate holding period for the units;
- the amount allocated to the current taxable year and any taxable year before the Trust became a PFIC would be taxed as ordinary income; and
- the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year.
6. What are the tax consequences of redeeming my units for gold?
Answer: If you have made a valid and timely QEF election and redeem your units, you will be required to currently include in your income your pro rata share of the Trust's gain from the disposition of physical gold bullion, which will be taxable to a non-corporate holder that has made a QEF election at a maximum rate of 28% under current law if the Trust has held the physical gold bullion for more than one year. Your adjusted tax basis in the units will be increased to reflect such gain that is included in income. You may further recognize capital gain or loss on the redemption in an amount equal to the excess of the fair market value of the physical gold bullion or cash received upon redemption over your adjusted tax basis in the units. Such gain or loss will be treated as described in FAQ #2 above.
If you have made a mark-to-market election, gain realized on the sale, exchange, redemption or other disposition of the units would be treated as ordinary income, and any loss realized on the sale, exchange, redemption or other disposition of the units would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously included by you. Any loss in excess of such previous inclusions would be treated as a capital loss. Your ability to deduct capital losses is subject to certain limitations. Any such gain or loss generally should be treated as U.S.-source income or loss for U.S. foreign tax credit limitation purposes. If you are subject to the Default PFIC Regime, gain realized on the sale, exchange or redemption or other disposition of the units will be treated as explained in FAQ #5 above.
7. I understand that the Trust is a closed-end fund and therefore is different from other ETFs in the market. Does this have negative operational or tax consequences to investors?
Answer: Since the Trust is a closed-end fund, it differs in certain respects from ETFs, which are generally open-end funds. One of these differences is that the Trust only redeems units on a monthly basis, provided that notice of redemption is provided the Trust by the 15th of the month. As a result, it is expected that most holders will sell their units on the market rather than redeem them with the Trust.
On a redemption of units by another holder, the Trust will be required to sell a portion of its gold in order to satisfy the redemption. Alternatively, the Trust may distribute a portion of its gold in-kind to satisfy the redemption, which for tax purposes is considered a sale of the gold by the Trust. The gain realized by the Trust on such a sale will be allocated pro rata amongst the Trust's unitholders (including the redeeming holder) and will be taxable to a U.S. investor who has made a valid QEF election at a rate of 28% assuming the gold has been held by the Trust for more than one year. Each unitholder's tax basis will be increased by the pro rata amount. For example, if the Trust has 40 million units outstanding, a unitholder redeems one million units and this redemption leads to a gain of $1 million realized by the Trust, each unitholder's pro rata share of the taxable gain would be $0.025 per unit, and the tax basis for each unit will be increased by that amount as well.
As noted above, it is expected that most holders will sell their units in the market to realize the full benefits of the long-term capital gains tax rate if they have held units for more than one year and have made a valid QEF election.
8. What tax information will I receive from the Trust?
Answer: The Trust intends to annually provide each U.S. investor with all necessary information in order to make and maintain a QEF election, including a PFIC Form. This information will be made available on the Trust's website.
9. What about foreign taxes?
Answer: Distributions, if any, by the Trust may be subject to Canadian withholding taxes. A U.S. investor may elect to either treat such taxes as a credit against U.S. federal income taxes, subject to certain limitations, or deduct his, her or its share of such taxes in computing such U.S. investor's U.S. federal taxable income. No deduction for foreign taxes may be claimed by an individual who does not itemize deductions.
10. Where can I find additional information about the tax treatment of an investment in the Trust?
Answer: You can find additional information in the Trust's prospectus.